The market has rallied for two days after declining -4% on average. Will the gains stick?
I would like to think the -4% decline over the prior week was just like all the other 3-4% declines we had over the last year and we are going to rebound back to the highs. Unfortunately I am not confident that will happen.
The option expiration week in August is typically the strongest week in the month. The rest of the month is typically week. History is a guide and not a guarantee. We can't always trade according to the prior year's events.
The geopolitical events seem to be turning positive but the ones that will bite us are the ones nobody sees coming.
Q2 earnings have been outstanding but guidance has been weak with 37% of S&P companies lowering guidance. That may not impact us in the coming weeks but it is something to worry about when Q3 earnings begin eight weeks from now.
The S&P futures are positive tonight and I added several new plays on the hope this rebound will continue. PLEASE, if the market opens lower don't just blindly jump into these positions. Use your better judgment and only enter the play if the market is positive.
Send Jim an email
Long Term Positions
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Current Position Changes
WCG - Wellcare Group (Close Long Put)
The insurance sector continued to decline on Monday and WCG is barely holding over support at $60. I recommended on Thrusday we close the short Sept $65 put and leave the long August $60 put open. That put only has four days remaining. I am going to recommend we close it at the open on Tuesday but if you are feeling lucky you might want to hold it until Friday.
The put is worth 60 cents today with WCG right at the $60 strike. If the market were to weaken or the sector collapse a decline under that $60 level could be hard and fast. If you are only holding 1-2 contracts the 60 cents is not going to make a material change in your life. If you have a large quantity then I would exit on Tuesday.
Closed Sept $65 Put, enry $3.96, exit $5.80, -$1.84 loss.
Close long Aug $60 put, entry .80, currently .60, loss 20 cents.
NOW - Service Now (Close Long Put)
NOW is pressing support at $55 and our long August $55 put will expire on Friday. I am recommending we close the long put and put a stop loss on the short put position at $54.45.
The long put is $1 below the stock price and now worth 65 cents. Like the WCG put above you might want to keep it open until later in the week just in cash disaster strikes. The 65 cents is cheap insurance but if the stock does not move lower that premium is going to evaporate very quickly.
Add stop loss to Sept $65 put @ $54.45
Close long Aug $55 put, entry $1.80, currently .65, -1.15 loss.
New Short Put Recommendations
SCTY - SolarCity
Earnings are now behind us for SolarCity and the recent volatility has boosted the premiums enough to give us a decent short term play. Support is about $69 and I am recommending the Sept $65 put.
Sell short SCTY Sept $65 put, currently $2.20, stop $67.65
GWPH - GW Pharma
GW Pharma is a company that produces drugs made from Cannabis plants. The recent flurry of news about legalizing marijuana has catapulted them into the spotlight even though in most cases their drugs do not contain THC. They have a solid base at $80 and high volatility. A break over $90 should trigger some serious short covering.
Sell short Sept $80 Put, currently $3.40, stop $79.85
YY - YY Inc
YY is rocking with a strong upside trend. The better than expected economic news from China and the resurgence in the Chinese markets has lit a fire under YY. I am recommending the $80 put strike, currently $9 below the stock price.
Sell short Sept $80 Put, currently $2.25, no initial stop.
New Covered Call Recommendations
SRPT - Sarepta Therapeutics
SRPT has put in a solid bottom at $20 and is testing resistance at $23. A breakout could come at any time. Shares were up +7% today and that inflated the call premiums.
Buy-write SRPT-Sept $24 call, currently $22.66-$1.35, no stop.
Gain if called $2.69.
ISIS - ISIS Pharma
ISIS is said to have the best pipeline in the biotech sector with 31 major drugs in development. The flurry of activity in the drug sector has put a bid under all the biotechs once again. ISIS is approaching resistance at $37 once again and this time I think it will break out.
I am recommending a longer term covered call so we can capture some of the stock appreciation.
Buy-write ISIS-Oct $38 call, currently $34.81-$2.05
Gain if called $5.24.
TKMR - Tekmira Pharma (High Risk Covered Call)
This is a high risk play. TKMR is working on an Ebola drug and shares have rocketed $10 higher just in the last two days. I expect some of that gain to fade. I am recommending we sell an in the money call to protect ourselves against a decline.
The Sept $20 call is $5.40 with TKMR at $23.80. That represents $3.80 in intrinsic value and $1.60 in speculation or time value. If you sell this call at the $23.80 closing price you are protected against a decline to $18.40. If called you make $1.60.
If you wanted to be a little more aggressive you could go out to the December $22.50 call, which is $1.30 in the money. The premium is huge at $6.10. If called you would make $4.80. Because of the big premium you are protected against a decline to $17.70.
Because this is a high risk position I am not making it a firm recommendation. If you want to take a chance I laid out the play description for you. However, this recommendation is not official and it will not be tracked in the newsletter.
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)
SCTY - SolarCity (Aggressive Short Put)
NOW - ServiceNow (Aggressive Short Put)
GILD - Gilead Sciences (Short Put)
WCG - WellCare (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.