Between earnings misses and market volatility I feel like we need helmets and a foxhole.

The severe intraday volatility is preventing premium decay on puts and the wide price swings are hitting stops left and right. This is not the market to be selling premiums of any kind.

We don't know from one day to the next which way the market is going to turn. The Dow is on a pattern of triple digit reversals almost daily. The Nasdaq and Russell 2000 are still leading us lower but dip buyers abound.

The Nasdaq rallied +36 points at the open then declined -97 points to 4,014 then rebounded +70 points to close only fractionally lower. The Dow rallied +139, declined -178, then rebounded to close with an 87 point gain. How do you sell premium in a market like that?

With the earnings cycle removing about 65% of stocks from consideration and the market testing the lows almost daily this is not a market for put sellers. Selling premium is a bullish strategy and we could be on the edge of a major decline in May. The sell in May cycle could be especially violent this year and May begins on Thursday.

For that reason I only added two plays today. We have taken a lot of losses over the last four weeks as a result of the market volatility. I don't feel like adding to those losses.

Jim Brown

Send Jim an email



Current Portfolio


Current positions

Covered Calls

Long Term Positions


Past performance

Click for 2014 Statistics through February

Click for 2013 Statistics


Current Position Changes


YY - YY Inc (stopped)

Last week YY had rebounded back above the support at the 100-day average and appeared to be in recovery mode. That recovery failed and our stop was triggered at $62.45.

Shares continued down to decent support at the $58 level and I am going to relaunch the play this week at that support level and try to get that $1.80 loss back.

Closed June $60 Put, entry $4.20, exit $6.00, -1.80 loss.



FB - FaceBook (Update)

Facebook posted good earnings but the weak market did them in. Shares declined -$5 over the last three days to put shares at $56 with support at $53.50. We have a short term and a long term position on FB. I am putting a stop on the short term June position at $52.75. If the Nasdaq collapses in the short term it will take us out of that position. The long term January position will remain open.

I am confident the stock will make new highs before year-end and that is why I launched this play.



MOBI & PRAN (No Change)

We are waiting for the market volatility to ease and a new rebound to begin in those stocks so as can sell some new covered calls.


New Short Put Recommendations


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 then rebounded to $69. That recovery failed and shares are back at the $58 level where there is decent support. The 200-day average is $55.62.

Shares fell $5 today on news China had banned "The Big Bank Theory," "The Good Wife," "NCIS," and "The Practice." The government did not say why they suddenly censored those shows after years of letting them be shown. All Chinese internet shares were down in reaction. This inflated the put premiums so it is potentially a good time to sell premium on YY.

On Thursday Maxim Group initiated a buy recommendation with a $90 price target.

Earnings are June 3rd.

Sell short June $55 Put, currently $5.20, stop loss $52.45.



New Covered Call Recommendations


None


New Aggressive Recommendations


None


New Long Term Recommendations


APC - Anadarko Petroleum

Anadarko Petroleum (APC) saw some very bullish call activity last week. Somebody bought 50,000 of the January $120 calls and sold 50,000 of the January $135 calls. Their net cost in the spread was $1.61 per share or $161 per contract. That works out to $8,050,000. Who would place a bet that big without some kind of inside knowledge? Almost immediately retail traders followed him and purchased about 2,000 of the $120 calls, now $2.26 each.

With Anadarko at $99.37 today that trader is betting on a huge pop in APC shares. About the only legal way to put a long bet that big on five-million shares would be if you were the company about to make an offer on Anadarko. Anyone with inside knowledge of a deal by someone else would immediately be arrested by the SEC for insider trading the day the deal was announced. However if you are Warren Buffet or Carl Icahn and you are accumulating stock/options in anticipation of announcing an offer or an activist position then buying a lot of calls would be legal.

The bottom line is that someone bet $8 million that APC will be well over $120 by January. The interesting part is that they sold the $135 calls for 58 cents ($2.9 million). That suggests they know the offer will be less than $135 or why limit your potential gains. It also reduced the cost of the spread from $11 million to $8 million so there was a decent benefit in capping the gains.

The pothole here is their upcoming earnings report on May 5th. Obviously a miss could push them lower and a beat could push them higher. There is additional risk in putting on a play ahead of earnings BUT the long term premise is still the same. Somebody bet $8 million they will be over $120 by January. More than 3,000 call contracts have been purchased at the $120 level since the big trade was started. This is other traders following the big money. Somebody else bought 1,500 $125 calls today against an open interest of 374.


I am recommending we sell the January $125 puts, currently $26.35. If the expected move comes true we will profit nicely. This is the equivalent of buying the stock today at $100. We will have the same exact risk as owning the stock but our gains are capped at $26.

Sell short Jan $125 Put, currently $26.35, no stop.



Existing Play Recommendations


Links to original play recommendation

CLVS - Clovis Oncology (Aggressive 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)

EMES - Emerge Energy (Short Put)

AEGR - Aegerion Pharma (Short Put)

YY - YY Inc (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.