Since it is not rational to sell premium on stocks about to announce earnings the current plan is to find good stocks that have already reported.
Unfortunately once they report the volatility in the option premiums drops to near zero and premiums shrink an equal amount.
There has to be some news risk in a stock or the premiums decline to zero. We have seen it many times with biotech stocks with huge premiums relative to the stock price because of an impending drug study. Once the news is released the premiums drop to pennies on the dollar.
In the earnings cycle the same is true. Premiums on Apple or Facebook the week before earnings are huge but two days after the event they are so cheap they are not worth selling.
To combat this problem we have to either find good stocks that blew away earnings and are charging higher or stocks where the earnings stunk and they suffered a major drop. The stocks moving higher tend to have inflated call premiums but the puts are rapidly declining. The reverse is true on the problem stocks.
There has to be an element of risk or there is no premium. In the three stocks I picked tonight I managed to find two moving higher after earnings and one that was crushed but still has good prospects.
The earnings cycle has produced some interesting results. Stocks reporting great earnings are getting slammed and some reporting sloppy earnings are turning out to be winners because earnings were not as bad as the whisper numbers. This is a crazy cycle with earnings growth approaching 9% while the economy is struggling.
Stock buybacks and cost cutting are still getting the job done today but eventually fundamentals will matter. Earnings for Q3 are now projected to grow +10% but Q4 is only expected to post a +3% gain thanks to tougher comparisons.
What is not priced into the market is the potential for a summer decline. Right now all the dips are being bought and as long as that trend continues we should be in good shape. Just be aware that the trend could change at any point and very quickly.
While nobody knows for sure quite a few people are expecting a late 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
LNG - 7/31
NOW - 7/30
FEYE - 8/05
SCTY - 8/06
CLVS - 8/07
EMES - 8/06
PANW - 8/27
LNG - Cheniere Energy (Close)
Cheniere had spiked up ahead of earnings to $76 but faded the last couple of days. They will announce earnings on Thursday and I want to close the play now and be safe rather than sorry. We have seen several energy stocks announce great earnings and still fall sharply at the open the next day.
Close Sept $70 Put, entry $2.70, currently $2.15, +.55 gain.
ITMN - Intermune (Closed)
I am recommended we close the ITMN stock position at the open on Tuesday. The covered call expired out of the money and ITM spiked up the following Monday. The stock gapped higher on Tuesday at the open so we got an extra bonus on the trade.
Closed ITMN shares, entry $39.56, exit $44.89, +5.33 gain
Expired July $42 Call, entry $1.84, exit $.00, +1.84 gain.
Net gain +$7.17.
CBI - Chicago Bridge & Iron (Stopped)
CBI reported record earnings, a $32 billion order backlog and the stock still sold off as a result of a twitter post by the short seller that has been forcing the stock lower. The short seller Prescience Point will not give mailing address prompting analysts to believe the company is located overseas and out of reach of our SEC rules. That also makes them immune to suits for defamation and erroneous claims.
We will be entering this play again once CBI finds a bottom on the bogus comments. The company has issued a rebuttal saying the claims are erroneous and fraudulent.
Closed Oct $75 Put, entry $7.60, exit $10.30, -2.70 loss
New Short Put Recommendations
GILD - Gilead Sciences
Gilead is probably one of the most talked about biotech stocks. Almost every analyst has a strong buy on Gilead and the average price target is $107. The company has a great pipeline and some of the best drugs on the market. Sovaldi, Gilead's Hep C drug, costs $84,000 and is so popular it knocked 30 cents off of earnings for WellCare (WCG) in the recent quarter. Sovaldi cures Hep C in 97% of patients. Sales in Q2 were $3.48 billion. The pills are $1,000 each and a 12 week course of treatment to cure Hep C costs $84,000. More than 80,000 patients have already been treated with Sovaldi. The CDC claims 2.7 million people in the U.S. and the WHO says 130 million worldwide have the disease. That is a huge market for Gilead.
The company beat on earnings last week and the stock closed at a new high today. There was no post earnings depression for GILD.
I am recommending a September $90 put, currently $3.05. This is just under the stock price but I do expect GILD to move higher. You could go out to October for $4.10 but earnings come back into focus on October 22nd.
Sell short Sept $90 Put, currently $3.05, stop loss $87.65
GRUB - GrubHub Inc
GrubHub posted decent earnings last week and then surprised analysts with strong Q3 guidance in the range of $55.5-$57.5 million in revenue and $13-$15 million in profits. Analysts were expecting $54.3 million for Q3.
Q2 adjusted earnings rose +56% to $16.9 million.
The stock spiked on earnings and then weakened with another consolidation day on Friday. Shares roared higher today with an 8% gain to $38.
It appears the direction is set and shorts are being forced to cover. We saw significant consolidation in early July at $32 as it built a pre-earnings base. This could allow the stock to continue its run and break out to new highs over $40.
The risk is a weak market where all of these high growth, high PE stocks will be vulnerable.
Sell short Sept $35 put, currently $1.45, stop loss $35.50
WCG - Wellcare Health Plans
Wellcare reported earnings on Friday and the stock dropped like a rock from $77 to $60. The company said it experienced higher than expected expenses starting its Florida Managed Medical Assistance program. The company said those expenses would reduce earnings by $1.05-$1.15 per share. WCG also said they recorded an "unfavorable development" of medical payments amounting to 74 cents per share. That is more than 10 times the expected cost.
The company lost $7.5 million or 17 cents a share on $3.15 billion in revenue. That revenue was nearly a 50% increase from the $2.33 billion in the year ago quarter.
While this sounds like a major catastrophe it is basically a series of one time charges for setting up the FMMA program and acquisition costs for Easy Choice Health Plan. Higher than expected drug charges also took their toll.
For our purposes the $17 drop in the stock price removed a lot of risk. On Monday Goldman Sachs and Sterne Agee upgraded the stock saying the sudden plunge had "de-risked" the stock and "We see substantial upside potential to currently depressed earnings." Analysts expect a wave of consolidation in the sector and WCG would definitely be a target at this price.
The damage has been done and this appears to be a "kitchen sink quarter" for WCG. Once they knew it was going to be bad they threw everything they had in the way of charges into the earnings report.
I believe WCG will move higher. Anyone owning it at $78 has got to like it better at $60 now that the charges are out of the way.
I want to sell the September $65 put, currently $3.80 and buy the August $60 put, currently 80 cents for protection. If WCG trades over $65 I want to sell that long put. This gives us protection against a further decline for another 18 days. By then we will know if the stock is moving higher.
Sell short Sept $65 put, currently $3.80, no stop.
Buy long Aug $60 put, currently .80 cents, stop loss $65.00
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)
CLVS - Clovis Oncology (Update Existing Position)
FB - Facebook (Long Term Short Put)
MOBI - Sky-Mobi Ltd (Covered Call)
PRAN - Prana Biotech (Short Put - Update)
ITMN - Intermune (Covered Call)
LGF - Lions Gate Ent (Short Put)
CBI - Chicago Bridge (LT Short Put)
EMES - Emerge Energy Svcs (LT Short Put)
LNG - Cheniere Energy (Short Put)
FEYE - FireEye (Short Put)
PANW - Palo Alto Networks (Short Put)
SCTY - SolarCity (Aggressive Short Put)
NOW - ServiceNow (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.