The hype in the pharmaceutical sector gave us some great plays in a down market.

The market in 2014 has been a challenge but up until today it was just mild headache. The -179 point drop in the Dow today turned into a full blown migraine for some investors. Earnings warnings and misses and huge declines in numerous stocks soured market sentiment.

The Dow has now declined -1.8% in 2014 and we are at the point where rebounds began whenever this happened in the last quarter. The selling was so pronounced and internals so negative I am not going to say buy the dip. However, there are some plays we can make that seem to be immune to the market decline.

Last week Intercept Pharmaceuticals (ICPT) spiked from $80 to $450 on positive results from a drug trial. While we can't expect to see those kinds of results by selling option premium we can profit from those moves since those premiums have doubled over the last week.

I like to play the strongest stocks in a weak market and the pharma news gave us several to choose from.

Jim Brown

Send Jim an email



Current Portfolio


Current positions

Covered Calls

Long Term Positions


Current Position Changes


SRPT - Sarepta Therapeutics (Closed)

I recommended we close SRPT last week after the stock lost -8% on Monday. We were able to exit for a gain despite the drop.

Closed Jan $16 put, entry $1.55, exit .55, +1.00 gain.

Chart


DE - Deere & Co (Closed)

I recommended we close DE last week after a steep decline as 2014 opened for trading. We were able to close for a nice gain before the drop continued.

Closed Jan $90 put, entry $2.75, exit $.82, +1.93 gain

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NUS - NuSkin (Close)

Nuskin rebounded after the FTC failed to mention them in the diet pill crackdown last Tuesday. However, the market weakness has pushed it back towards our strike at $135 and I am recommending we close at the open on Tuesday to avoid the possibility of dropping in the money before Friday's expiration. Better safe than sorry.

Buy to close: Short Jan $135 put, entry $2.72, currently $2.02, +.70 gain.

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ILMN - Illumina (Close)

The put premium has declined to 11 cents and there is nothing to be gained by leaving this position open. You can let it expire on Friday if you want but I prefer to remove the risk of the down market and exit the play.

Buy to close: Short Jan $95 put, entry $2.45, currently .11, +2.34 gain.

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TWTR - Twitter (Closed)

Last week was dog pile week for Twitter. Every day at least one analyst came out with a new sell rating and the stock dropped daily to finally hit our stop at $59.50 and take us out of the position.

Closed short Feb $55 put, entry $3.80, exit $5.47, -1.67 loss.

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HIMX - Himax Tech (Close/Write New)

We have a short Jan $15 call on HIMX and the stock has declined slightly since we wrote the call. I want to close this call early even though it will expire on Friday. I want to replace it with a March $14 call before the February calls become the front month and premium deflates. By rolling forward a week early we can get a few extra pennies.

Buy to close Jan $15 call, entry .61, currently .03, +.58 gain.

Sell short March $14 call, currently $1.15, no stop.

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New Short Put Recommendations


None

We are not selling puts in a falling market.


New Covered Call Recommendations


EXAS - Exact Sciences

EXAS has a new colorectal cancer screening process up for approval in March by the FDA. Premiums have inflated after SRPT spiked $375 in two days last week. The risk should be minimal because of all the hype around pharma this year.

This is longer than normal but we want to get past the March FDA event in order for the premiums to be high.

Buy-write EXAS Apr $15 Call, currently $14.03-$1.70, no stop.

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ARWR - Arrowhead Research

This company specializes in RNAi research on targeted drug delivery systems. This technology is hot today and the company is a likely takeover target. There was news on the sector on Monday that spiked the stock and allowed it to close positive but you can see there has not been much selling in this stock in weeks.

Buy write ARWR Mar $12.50 Call, currently $12.32-$1.60, no stop.

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New Aggressive Recommendations


None


New Long Term Recommendations


CLVS - Clovis Oncology

This is the king of covered calls this month. Clovis is rumored to be the next ICPT with drugs in trials that will end before July. They have several in the pipeline and analysts are saying this stock could be well over $100 after the announcements.

The stock has spiked on all the positive commentary by analysts and investors buying on the hope of getting another ICPT like explosion in prices. We don't have to be greedy. We can write a simply covered call and collect $16 for our trouble.

Buy-write CLVS-July $75 call, currently $76.26-$17.10.

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Existing Play Recommendations


Links to original play recommendation

PHM - Pulte Homes (Covered Call)

PHM - Pulte Homes (CC Update)

CZR - Caesar Ent (Covered Call #1)

CZR - Caesar Ent (Covered Call #2)

CZR - Caesar Ent (Covered Call #3)

LNG - Cheniere Energy (Covered Call)

INTU - Intuit (Covered Call)

TSLA - Tesla Motors (Long Term Short Put)

ILMN - Illumina (Aggressive Short Put)

DE - John Deere & Co (Short Put)

BA - Boeing (Aggressive Short Put)

INCY - Incyte (Covered Call)

TWTR - Twitter (Aggressive Short Put)

TAN - Solar ETF (Long Term Short Put)


Margin Requirements:

There are several different formulas for determining margin requirements for naked put writing. These are normally broker specific and some can require larger margin requirements than others.

Here is the most common margin calculation for naked puts.

100% of the option premium + ((20% of the Underlying Market Value) - (OTM Value))

For simplicity of calculation simply use 20% of the underlying stock price and you will always be safe. ($25 stock * 20% = $5 margin)


Prices Quoted in Newsletter

At Option Investor we have a long-standing policy prohibiting the editors and staff from actually trading the individual recommendations in order to conform to SEC rules concerning trades.

The prices quoted in the newsletter are the end of day prices in most cases.

When discussing fills or stops the prices quoted are the bid/ask at the time the entry trigger or exit stop is hit. This is NOT a price that someone on staff actually got using a live order.

For entry/exit points at the market open the prices quoted will be the opening print. The majority of the time the readers are able to get a better fill than the opening print because of market maker bias at the open.

For trades with an opening qualification the prices quoted will be the bid/ask at the time the qualification was met.

All of these rules normally produce worse prices than an active trader would normally get. Because they are standardized there may be some cases where a price quoted was better than an actual fill. If you received a price that was dramatically different than what was quoted please let us know.