Nobody ever said selling option premiums would be uneventful.
The Nasdaq/biotech sell off was painful. We were stopped on multiple plays. I thought the selling had ended last Monday but I was wrong. The carnage continued on the Nasdaq until Thursday.
We suffered several more stop outs this week and several of our positions are significantly underwater. However, the biotechs rebounded strongly on Monday and hopefully they will continue higher.
Nobody can accurately predict market direction. There is always the impact of the unexpected and we have to deal with those events. Investing of any kind has risk. If we had been owners of those biotech stocks our losses would have been many times greater. However, since we are managing our risks with stops and by picking strong stocks our losses were minimal although still painful.
Prana (PRAN) was another "opportunity" today. The stock lost -71% today. Fortunately we were protected by a long put and we knew an adverse result on the drug trial could cause a serious decline. It was a well thought out play but the drug study results went against us.
In researching plays for today there were still a lot of ugly charts. After being burned with a continued decline last week I was hesitant to add a lot of plays. We are also moving into that place in the quarter where earnings reports get in the way of expirations. There were several stocks I wanted to play but their early earnings prevented a rational play setup.
April is typically a bullish month with the average gain +3.4%. I am worried about a rebound in the indexes to a new high and then a fast fade into the "sell in May" cycle. That is another reason we don't really want to load up on May expirations unless the play is worth the risk. We can be cautious and still have new plays. We just need to be aware of the calendar and the market direction.
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PRAN - Prana Biotech
Prana imploded today with a -71% decline after they released the results of the latest PBT2 trial. We had expected these results to be positive after the doctors in the trial requested an extension. Normally that means the drugs are working and the doctors want to continue to treat their patients with the experimental medicine.
In this case the results were positive but not in the main portion of the trial. They were looking for a decrease in the beta-amyloid plaques in the brain of Alzheimer's patients. There was an overall reduction but not in the way they were expecting. Soluble Abeta peptides in spinal fluid were significantly reduced but insoluble plaques were not.
Prana is still encouraged by the results despite the endpoint goals not being reached. They are going to continue to research the drug, which they call "a safe and well tolerated drug candidate for Alzheimer's disease." There is a "strong body of evidence for the efficacy of PBT2 in Alzheimer's disease."
The company is also proceeding with plans for a confirmatory study for Huntington disease. Based on previous discussions with the FDA, "the data on safety and tolerability of PBT3 in Alzheimer's disease will support the future clinical development and, ultimately, a New Drug Application in Huntington disease."
While investors were hoping for PBT2 to be the new cure for Alzheimer's and for the stock to spike to $50 it did not happen in this trial. However, PBT2 is not done. There are numerous other tests planned and the application for Huntington's where it has shown considerable promise. Prana has other things in the pipeline and this drop to $3 is not the end of their world. I would look for an immediate dead cat bounce and then a slow crawl out of the dungeon.
I anticipated a possible negative result when we added the long put at $10 in addition to the short May $20 put. The long $10 put is now worth $7.20 and a +$5.01 gain. The short $20 put is down -$6.80 so we are in the hole roughly $1.80.
I am recommending we close the long $10 put at the open on Tuesday. That premium income reduces our risk on the play. The stock only has to rebound roughly $2 to break us even.
I want to add a November $3 call, currently 85 cents. If the stock rebounds to $5-$6 or more we will make money on the call as well as the put. The short $20 put expires in May but I want the call to last as long as possible. Aggressive traders may want to buy extra calls on this dip.
This drop in Prana is not the end of the world. I was once short 10 contracts of the $220 puts on Microstrategy and it gapped down to $110 on some bad news. When I loaded my charts that morning i thought, "I don't remember MSTR having a stock split." Unfortunately it was not a split but a major hit but I eventually traded out of it for a profit. Never give up.
Close Long Apr $10 Put, entry $2.19, currently $7.20, +5.01 gain.
Buy to open Nov $3 Call, currently $0.85, no stop.
PII- Polaris Industries (Stopped)
Polaris declined to our stop at $135.50 during the Nasdaq sell off. This knocked us out of the play for a loss.
Closed April $140 Put, entry $4.40, exit $6.00, -1.60 loss
YUM - YUM Brands (Stopped)
YUM gapped down -$2 on Thursday to $72.23 hit our stop at $72.25 by 2 cents and knock us out of the trade for a minor loss. Of course the rebound was immediate and YUM closed over $75 today.
Closed Short July $80 Put, entry $9.10, exit $9.40, -0.30 loss.
BBRY - Blackberry (close)
Blackberry crashed through support when they reported earnings on Friday and continued the drop today. I considered just closing the current covered call and writing another one but the stock was down big today on a bullish day for the markets. I decided to just close the play and take a small loss before it gets bigger.
Close BBRY shares, entry $9.90, currently $8.08, -1.82 loss
Previously closed Feb $10 call, entry .68, exit .10, +.58 gain.
Net loss $1.82 - $1.32 = .50 loss.
GILD - Gilead Sciences (Update)
Gilead was caught in the biotech wreck. The stock was knocked for $10 loss but stopped at the support of the 200-day average. All the analysts are very bullish on GILD. They expect them to earn $10 in 2015 and with a PE of 15 that would equate to a $150 share price.
We have already received about $6.50 in premiums on GILD calls. We have two options. We can continue to just sit on the stock and let the May $80 calls expire or we can close this position and sell a June strike. We would have to pick a lower strike for June to make it worthwhile and that means taking a loss on the stock portion.
I am suggesting we just wait this one out. In theory GILD will rebound by May and we will be called away. If the stock rebounds but not quite to $80 then we can sell a new call for June.
Hold the current position but add stop loss at $66.85
MOBI - Sky-Mobi Ltd (Update)
We have an April $10 covered call on MOBI that we entered when MOBI was $11.46. The stock declined in the Nasdaq sell off last week to close at $8.80 today. We could close the April call and write a May $10 call, currently 95 cents.
However, we could wait until closer to expiration in hopes MOBI returns to somewhere near the $10 level and the initial call expires. If MOBI was closer to $10 we could then write a $12.50 call for May or June and add to our profits.
I am recommending we add a stop loss at $9.75 on the original April $10 call. Since we are in April now the premium should decline as we near expiration even if MOBI trades higher. If we are stopped at $9.75 I would immediately write the May $12.50 call.
Add stop loss on April $10 call at $9.75.
If the stop is hit immediately write the May $12.50 call.
New Short Put Recommendations
VRX - Valeant Pharmaceuticals
Valeant was one of the biotech companies that were hit hard by the crash. The stock gave back -$15 at the lows but bounced immediately from the 100-day average. Shares rose +3.25% on Monday.
They just received approval for a new antibiotic last week. Valeant will receive a progress payment of $57 million from Actavis now that the drug is approved.
Insiders are buying the stock at this level. The EVP bought 2,481 shares for $334,859. When insiders are buying the dips that is a good sign.
With earnings not until May 29th we could go all the way out to the May strikes for more premium but I am sticking with April.
Sell short APR $125 put, currently $2.35, stop loss $124.85
IOC - Interoil Corp
Interoil finally got a deal done for the Elk-Antelope discovery offshore Papua New Guinea. They have been working on this for a couple years, first with Exxon, then Shell. They finally got a deal signed with Total SA.
Under the terms of the deal Interoil got $401 million at closing plus $73 million when Total completes their investment research and another $65 million when the first LNG cargo ships. Interoil also retains 35.5% interest in the field and payments for gas volumes once Elk-Antelope is finally appraised. All but the closing payment will take years to receive but Interoil stuck with it and now they are being rewarded.
Earnings were March 31st.
Sell short May $60 Put, currently $2.59, stop loss $60.50.
New Covered Call Recommendations
NPSP - NPS Pharma
NPS is a biopharmaceutical company developing therapeutic products in the USA. There are currently 9 analysts that rate it a buy, 1 hold and no sells. The company saw revenues rise by +100% and earnings growth of +150% over the last year.
The stock crashed back to support at the 200-day average over the last month as the biotech sector was crushed. It has held at this level for a week and Monday posted a decent gain.
While we can't guarantee that the selloff in biotechs is over I am encouraged by the solid hold at the 200-day while the other stocks were still falling.
Buy write NPSP-May $30 Call, currently $29.93-$2.20, stop loss $26.85
New Aggressive Recommendations
New Long Term Recommendations
Existing Play Recommendations
Links to original play recommendation
CLVS - Clovis Oncology (Aggressive Covered Call)
EXAS - Exact Science (Covered Call)
BBRY - BlackBerry (Covered Call)
YUM - YUM Brands (Aggressive Short Put)
AAL - American Airlines (Covered Call)
FB - Facebook (Long Term Short Put)
AVG - AVG Technology (Short Put)
PII - Polaris Industries (Aggressive Short Put)
NLNK - Newlink Genetics (Short Put)
LNG - Cheniere Energy (Short Put)
NUS - NuSkin (Aggressive Short Put)
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.