Post earnings volatility was brutal for any company that did not produce outstanding earnings.
The Q1 earnings cycle was not kind to us. Several of our positions suffered post earnings distress and the sharp decline in the Nasdaq and Russell only added to the pain.
Today the major indexes rallied to new highs but that does not mean the worst is over. Short squeeze Monday's are normally followed by "Turnaround Tuesdays." Hopefully that is not the case this week but time will tell.
I only added three plays today because I am not convinced this rally will hold. I am perfectly willing to play it but the monster short squeeze killed a lot of entry points.
The chart below is an example of hundreds of charts I looked at today. The market rally was one giant short squeeze and stocks trending down over the last couple of weeks suddenly exploded higher. This chart is not tradable and this was what the majority of charts looked like.
With the Volatility Index ($VIX) falling to a five month low the option premiums also shrank to near invisibility in many cases. We all know the market saying, "When the VIX is low it is time to go. When the VIX is high it is time to buy." The VIX is at a five month low indicating nearly every investor is bullish. Those that are not bullish are probably being forced to cover their shorts this week.
We had a rough spell over the last six weeks and had a lot of positions go against us. I would rather not load the boat again only to have it capsize in the coming weeks. We can continue to add sparingly and pick our battles until the market actually develops a trend.
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Long Term Positions
Click for 2014 Statistics through February
Click for 2013 Statistics
Current Position Changes
New stop Losses
Please check the portfolio graphics above for new stop losses in bright yellow.
AEGR - Aegerion Pharma (Closed)
We closed AEGR at the open last Tuesday ahead of earnings. I am really glad we did.
Closed Jun $40 Put, entry $2.75, exit $3.00, -.25 loss.
YY - YY Inc (Stopped)
YY collapsed last Wednesday when the Nasdaq suffered the big loss. We were stopped out at $52.45 on the drop. Our profitable position turned into a minor loss.
Position: Short June $55 Put, entry $5.50, exit $6.00, -.50 loss
EMES - Emerge Energy
Emerge has done nothing but accelerate since we added this position. The June $65 put has declined in value to 15 cents and there is nothing to be gained by continuing to hold the position.
Close June $65 Put, entry $1.70, currently .15, +1.55 gain.
PRAN (Close put)
We are holding an expiring May $20 naked put on PRAN. We shorted the put when PRAN was $10.34 in expectations for their new Alzheimer's drug trial to be a success. We were also long an April $10 put as protection against a negative announcement.
Unfortunately the announcement was negative and a killer for the stock. Shares declined from $10 to $2 and we closed the long put for a profit of $5. We bought (3) November $3 calls in anticipation of a rebound in the shares. About that time the biotech wreck appeared and further depressed the stock.
Today shares are $1.60 and our May $20 put is negative by $8.17. After deducting the $5.19 in gains on the prior two puts we will lose -$2.99 if we close the position today. That will leave us with the three November calls to possibly recoup our loss. All we need is one decent press release about another drug trial and we will be off to the races again.
Close May $20 Put, entry $10.40, currently $18.57, -8.17 loss
Previously closed April $9 put, entry $1.90, exit $1.72, +.18 gain
Previously closed April $10 put, entry $2.19, exit $7.20, +5.01 gain
Net loss $2.99 with (3) long calls remaining.
NUS - Nuskin (Update)
Nuskin reported record earnings for Q1 but warned that the investigation in China in Q1 put them behind for the full year outlook. They suspended recruiting in China in Q1 while the investigation was ongoing. After the investigation ended they restarted operations but they lost two months of activity. The lowered full year guidance knocked the stock back about $10.
However, EVEN WITH the investigation revenue in China increased +63% in Q1 to $279 million, up from $171 million. Sales leaders increased by 41% and active members increased by 17%. That is hardly a negative report with Northern Asia, South Asia/Pacific and the Americas only increased an average of 6%.
I still believe Nuskin will move higher in the coming months. The bad news is now priced into the stock and it is holding well above strong support at $71.50. I recommend continuing to hold this position.
New Short Put Recommendations
SCTY - Solar City
Solar City blamed the weather for a crummy quarter and this is one company I can understand why it would impact them. It would be really hard to install solar panels on the icy roof of a house or building in the blowing snow. However, they raised their full year outlook on expectations of a strong rebound in demand. Shares bounced back from the earnings drop and should move higher from here.
Resistance is $56 and again at $60 and $65. As a former momentum stock it is trading well off the $88 highs from February. Support is $51.
You can go tame on this play using the June $50 put strike at $2.56 or be somewhat aggressive with the $60 strike at $8. Personally, I would go with the $60 strike because the risk is almost exactly the same after deducting the premiums but the reward is significantly greater.
Sell short SCTY June $50 Put, currently $2.56, stop loss $50.50
NLNK - Newlink Genetics
Newlink is another biopharma company with multiple drugs in clinical trials. They reported earnings last week that were in line with estimates and reported on several existing trials. Investors were happy there was no unexpected news and the shares rallied to close over the 200-day on Monday.
Newlink is one of the few shares that are very reactive to the 300-day average. This was solid support over the last month and provided a solid base for the current rebound.
Sell short June $24 Put, currently $2.00, no stop.
New Covered Call Recommendations
ARWR - Arrowhead Research
Arrowhead is a biopharmaceutical research company developing targeted RNA therapeutics in the USA. They have multiple drugs in testing with a chronic hepatitis B infection drugs in Phase 1 trials. We have played ARWR in the past.
Shares have declined from a high of $27 to support at $9.75. The stock closed at $10.91 today. We can sell the June $11 call for $1.60 and roughly 15% of the stock price. The premium protects us down to just over $9 with support at $9.75.
Earnings August 7th.
Buy-write ARWR June $11 Call, currently $10.91-$1.60, stop loss $8.95.
New Aggressive Recommendations
New Long Term Recommendations
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)
APC - Anadarko (Long Term Short Put)
GWPH - GW Pharmaceutical (Long Term Short Put)
GWPH - GW Pharmaceutical (Short Term Short Put)
INCY - Incyte Corp (Short Put)
INSM - Insmed Inc (Covered Call)
INSM - Insmed Inc (Long Term 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.