You can tell when a stock is going to report earnings by looking at the option premium for several months in advance.
When you look at an option montage and the premiums by week for a given strike are $2, $2.25, $2.50, $6, you know there is an earnings event between those last two weeks. Investors are willing to sell premium cheap ahead of an earnings event but they don't want to sell premium after the event for anything resembling a reasonable amount.
Earnings can produce significant spikes higher and crashes lower. Owners of those stocks want to be compensated if they are selling calls. Traders selling naked puts also want some decent premium to take the risk of a strong gap down.
This week was another struggle to find any stocks with decent charts and decent premiums and without an earnings event in the next several weeks. This is the worst month of the earnings cycle with 30% of the S&P reporting in each of the third and fourth weeks of July.
I am also worried about the market and the new highs on low volume and weak breadth. The advancers were only 2:1 over decliners on Friday on 3.5 billion shares of volume. While I don't expect fund managers to come back to work next week and hit the sell button anything is always possible.
I limited the new plays to three this week because the internals are getting a little choppy. We were stopped out of several plays with big drops on no news. We may be hitting new highs but the momentum stocks are getting knocked for some losses.
While nobody knows for sure quite a few people are expecting a summer decline I would caution you not to overextend your personal portfolio. Take smaller positions and only those you feel comfortable holding through some market volatility.
Send Jim an email
Long Term Positions
Click for 2014 Statistics through February
Click for 2013 Statistics
Current Position Changes
Here are the earnings dates for our current positions. We need to be out of the positions before the earnings. That is not applicable for the long term positions or stock held for future call writing. Covered call positions will be evaluated the week before the expiration. Most of our current calls expire in July and will not be a problem. Some don't.
LGF - 8/28
ISIS - 8/05
FEYE - 8/05
GTAT - 8/06
YNDX - 7/24
ITMN - 7/31
VNET - 8/21
CLVS - 8/07
YOKU - 8/21
UBNT - 8/07
NLNK - 8/05
AMBA - 9/02
QIHU - 8/26
KORS - 8/27
GOGO - 8/07
FEYE - FireEye Short Put (Closed)
FEYE had rallied $5 from our entry point and the short July $32 put was now $9 OTM and had declined to ten cents. There was no reason to continue holding this put and the associated risk. I recommended we close the position.
Closed July $32 Put, entry $2.00, exit .08, +1.92 gain
AAL - American Airlines (stopped)
The August $40 short put was stopped out for a gain when AAL declined to $42.25. The drop in the airlines last week was remarkable and the news was minimal. When funds decide to take profits in the high flyers it happens all at once.
Closed AAL Aug $40 put, entry $2.05, exit $1.10, +.95 gain.
MMYT - MakeMyTrip (stopped)
After setting a new high at the open on Tuesday it was all downhill from there with nearly a -10% drop. The position was stopped out at $32.45 for a loss.
Closed Aug $35 Put, entry $2.50, exit $4.20, -1.70 loss.
ARWR - Arrowhead Research (Stopped )
Support at $13.50 failed on Tuesday to stop us out at $12.85. This covered call had been in the money for nearly a month but it came back to bite us just before expiration. Fortunately the call premium had evaporated and weescaped for a minor loss.
Closed ARWR shares, entry $14.52, exit $12.85, -$1.67 loss.
Closed July $15 call, entry $1.80, exit .50, +1.20 gain
Net loss 37 cents.
KNDI, MOBI, PRAN (Update)
The three positions we are holding and waiting for an opportunity to sell additional premium are doing well relatively speaking.
MOBI shares are left over from a covered call that declined sharply. The stock has rebounded from $6 to trade up to $8.50 over the last couple weeks on takeover rumors. I hesitate to sell a new call to reduce our shortfall if the company is about to be acquired. I know rumors are just rumors but this one has been persistent. I am going to give it another week or two and then write a new call.
KANDI (KNDI) has traded as high as $15 last week and our cost in this covered call stock is $17.65. As long as the trend remains positive I am encouraged. I would like to sell the $17 call but we have to reach out to September to get any premium. I am going to give KNDI another week and see if we can get a move over $15 to inflate that call.
Prana Biotech (PRNA) is a leftover from a bad drug trial report that knocked the stock down from $10 to $3 overnight. The initial positions were all closed or expired and we have three November $3 calls tht we bought for 48 cents in hopes of a recovery in the stock. Shares have been moving up nicely but they still have a steep climb ahead. What we need is a new headline from the company about some drug event and shares would catch fire again. Plenty of time and the risk here is minimal.
New Short Put Recommendations
NLNK - Newlink Genetics
We already have a covered call play on NLNK and the stock is moving up nicely. It is approaching resistance at $28 and I expect it to breakout. There has not been any news in a month. I am looking at the August $25 put with support at $26.
Earnings are August 5th and we need to reevaluate the position ahead of earnings. Hopefully it will have evaporated to the point where we can close it.
Sell short August $25 Put, $1.80, stop loss $25.50
QIHU - Qihoo 360 Technology
QIHU has a pretty good rebound in progress and just broke over the 100-day average on Wednesday. There was a dip on Friday as a result of some China news. This inflated the put premiums to allow us to sell the August $85 for $2.00 or the $87.50 for $3.80. In this period of market highs on low volume I am going the safe route and picking the $85 strike.
Earnings are August 26th and after the August option expiration.
Sell short QIHU Aug $85 Put, currently $2.05, stop loss $89.85.
KORS - Michael Kors
Kors shares were slammed back on June 13th after Coach warned and the entire luxury sector crashed. Kors is immune to these factors. They are the fastest growing retailer in the U.S. and overseas. They have just scratched the surface overseas and they are opening stores as fast as they can build them. I am a believer in Kors and I think they will blow away earnings. Fortunately they are on August 27th and the week after expiration.
I am recommending a put strike just under that $88 support level. The stop is tight to the strike but hopefully they will move up from here.
Sell short August $87.50 put, currently $2.70, stop loss $88.25
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)
FB - Facebook (Long Term Short Put)
MOBI - Sky-Mobi Ltd (Covered Call)
KNDI - Kandi Technology (Covered Call)
NUS - NuSkin (Aggressive Short Put)
PRAN - Prana Biotech (Short Put - Update)
APC - Anadarko (Long Term Short Put)
GTAT - GT Advanced (Covered Call)
YNDX - Yandex (Covered Call)
ISIS - Isis Pharma (Covered Call)
ISIS - Isis Pharma (Long Term Covered Call)
ITMN - Intermune (Covered Call)
FEYE - FireEye (Short Put)
CLVS - Clovis Oncology (Update Existing Position)
ARWR - Arrowhead Research (Covered Call)
GOGO - GOGO Inc (Covered Call)
AAL - American Airlines (Short Put)
ISIS - Isis Pharma (Covered July Call)
TAN - Solar ETF (Long Term Covered Call)
FEYE - FireEye (Long Term Covered Call)
VNET - 21Vianet Group (Covered Call)
YOKU - Youku Toudo (Covered Call)
LGF - Lions Gate Ent (Short Put)
MMYT - MakeMyTrip Ltd (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.