The markets returned to strong resistance as we await critical earnings reports.
The markets returned to resistance and it remains to be seen if we can move above this level. It depends on the various earnings reports from high profile companies this week.
The market action on Monday was encouraging but far from exciting. The gains were decent but the volume was the lowest of the year at 4.8 billion shares. There is no conviction in that few shares traded.
A reader (Brian) took the opportunity to point out what the PRAN play should have looked like. Another biotech stock we have played before saw the FDA approve their drug rather than the failed study we got from PRAN. The company was Sarepta (SRPT) and the stock spiked +$9.58 or +39% today. I had SRPT on my watch list for the prior month but because the trend was negative I had ignored it as a play. For those readers that own PRAN shares it is not dead. There will be another press release on some hot new drug and it will come back to life.
The decline in the biotech sector has stimulated several deals and this should push prices higher for everyone. After the close today Valeant (VRX) said it was partnering with Bill Ackman to buy Allergan (AGN) for $45 billion. AGN shares were up $25 in afterhours. Over the weekend Pfizer (PFE) was said to have held talks to buy Astrazeneca (AZN) for $101 billion. This activity will not be lost on the rest of the sector.
Earnings are killing us again. I had over 100 potential candidates based on charts and option premiums that were discarded because of impending earnings. Over 500 companies are reporting this week along with 31% of the S&P-500. Next week is just as bad. Companies that have already reported have no option premiums because there is no mystery left. They already confessed and investors are moving on to other plays.
Hopefully the earnings will be strong enough to bring traders back into the market but the closer we get to May the weaker I expect the market to become. I hope I am wrong. With economics improving and the potential for many companies to beat the lowered expectations for earnings we have a chance for future gains but the seasonality is against us.
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Long Term Positions
Click for 2014 Statistics through February
Click for 2013 Statistics
Current Position Changes
EXAS - Exact Sciences (Closed)
I am recommending we close the entire position last week after the trend on EXAS turned negative and the stock broke support.
Closed EXAS shares, entry $14.14, exit $11.98, -$2.16 loss
Closed April $15 call, entry $1.80, exit .05, +1.75 gain.
Net loss -.41
AAL - American Airlines (Closed)
AAL had broken through two levels of support and closed at a two month low last Monday. I recommended we close the play to avoid further losses.
Closed AAL shares, entry $36.63, exit $33.52, -3.11 loss
Closed May $38 Call, entry $1.60, exit .47, +1.13 gain
Previously closed Mar $37 call, entry .95, expired, +.95 gain.
Net loss = -$3.11, +1.13, +.95 = -1.03.
PRAN - Prana Biotech (New Calls)
We were hit hard by the results of the PBT2 drug study in Prana. However that is not their only drug and they are still working on releasing PBT2 for other diseases where it was found to provide significant improvement in the patient's life.
I believe we will see a press release over the coming weeks or months that send the stock soaring again. As part of the recovery plan we bought the November $3 calls when PRAN crashed. Those calls are only 25 cents today. After the news about Allergan and AstraZeneca the biotech sector should rebound. I want to add some more calls to this play. At 25 cents it is $25 a contract and they could be worth 10 times that if PRAN publishes the right press release or somebody makes an offer for them at this dramatically reduced price.
Buy (2) Nov $3 calls, currently 25 cents, no stop.
That will give us a total of 3 contracts.
FB - FaceBook (Update)
Facebook shares are finally rebounding and closed at a 7-day high. They finally broke back above resistance at $60. They will report earnings on April 23rd and I expect them to beat expectations. Unfortunately a lot of people expect them to beat given the acceleration of their mobile ad products. If they do beat strongly from this depressed level we could see a big spike.
However, if they disappoint it could be ugly. If you are concerned about the potential for a decline I would suggest you exit this play before earnings. I am confident the stock will make new highs before year-end and that is why I launched this play.
New Short Put Recommendations
EMES - Emerge Energy Services
Emerge is a master limited partnership with a 6.5% dividend. They specialize in providing fuel and frac sand to the shale fields around the country. Their business is exploding and profits surging. They are paying about $1 a quarter in dividends.
They had earnings a couple weeks ago and the chart is very strong. I rarely play MLPs in any form because the dividend payments can cause havoc with the stock price when it goes ex-dividend. The stock volatility for Emerge has been minimal and brief over the last two quarters. The next dividend record date should be about May 15th. If the stock continues on its current trajectory we will be well out of danger by then.
Earnings were three weeks ago so that is also a plus.
I am recommending the June $65 put for $2.05 but aggressive traders may want to reach out to the June $70 put at $3.70.
Sell short June $65 Put, currently $2.05, stop loss $68.45.
AEGR - Aegerion Pharma
With all the activity in the biotechs I am venturing back into the sector. Aegerion declined from $100 to support at $42 and has held at that level now for nearly a month. With all the acquisition activity they should catch a bid as one of the most oversold in the group.
Earnings are May 28th.
Sell short June $40 Put, currently $2.85, stop loss $39.85 (ITM)
YY - YY Inc
YY operates an online social platform in China. They engage users in real-time group activities through voice, video and text. Shares collapsed from $90 to $57 in the Nasdaq crash and have rebounded to $69 and back above the support of the 100-day average.
Earnings are June 3rd.
Sell short June $60 Put, currently $4.40, stop loss $62.45.
New Covered Call Recommendations
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)
AAL - American Airlines (Covered Call)
FB - Facebook (Long Term Short Put)
MOBI - Sky-Mobi Ltd (Covered Call)
KNDI - Kandi Technology (Covered Call)
LNG - Cheniere Energy (Short Put)
NUS - NuSkin (Aggressive Short Put)
PRAN - Prana Biotech (Short Put)
PRAN - Prana Biotech (Short Put - Update)
PRAN - Prana Biotech (Short Put - Update)
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.