What happens after the market rallies nonstop for two weeks and reaches new highs?
We hope it will continue for another two weeks but we know the chances of that are slim. The market is in rally mode but even rallies that last for months normally have pauses for profit taking. I think we are due for one of those pauses.
Since we did have a -3.7% decline just three weeks ago we could move higher before pausing to consolidate but the round number psychological resistance at S&P 2,000 was hit on Monday. That could be a soft sell signal as traders exit winning positions and wait for a pause to launch new ones.
Unfortunately millions of traders have busted out over the years by betting against the continuation of a rally. It is like betting against red or black on the roulette table. Just because one color has appeared for 6, 8, even ten times in a row does not mean it can't continue its string. Rallies can continue far longer than bears can remain liquid betting against them.
I don't think we are in that kind of situation but I don't want to bet against it. I tightened up some of the stops and I only added 4 new plays this week. We are starting to load up the portfolio and one sudden downdraft could knock us out of a lot of positions for losses. The rally has produced profits in those current positions but they can be erased by a single headline.
We want to keep our eye on the ball and be ready to exit if conditions warrant. If the rally continues I will keep advancing the stop losses to take us out with a profit.
Send Jim an email
Long Term Positions
Current Position Changes
GILD - Gilead Sciences (Close)
Gilead is running away from the pack and our short September $90 put has declined to 20 cents and it is no longer worth the risk and margin to keep it open. Close the position.
Close Sept $90 Put, entry $2.78, currently .20, +2.58 gain.
New Short Put Recommendations
RCPT - Receptos Inc
Receptos is a clinical-stage biopharmaceutical company focusing on the discovery, development and commercialization of various therapeutics for immune disorders. The stock has been pretty volatile but the recent trend is higher. The ITMN acquisition today caused an 8% spike in RCPT and inflated the premiums.
Sell short Oct $45 Put, currently $3.70, stop loss $45.25
ASPS - Altisource Portfolio Solutions
ASPS manages large real estate portfolios from loan servicing to property preservation and remarketing. Shares were crushed in early August from an earnings disappointment. Since all the bad news is already priced in and shares are rebounding from crisis support at $85 we should be reasonably safe to sell a short put at that $85 level.
You can sell the September $85 for $1.75 with three weeks to go. I am recommending the October $85 because of the higher premium.
Sell short Oct $85 put, currently $3.90, stop loss $84.25
New Covered Call Recommendations
ACHN - Achillion Pharma
ACHN was in the news over the last two weeks as a possible takeout candidate. The acquisition of Intermune (ITMN) announced today gave ACHN another kick in the pants higher. They have three different Hepatitis C drugs in the pipeline. The option premiums are inflated as a result of the news.
I am going to recommend an October position using the $12 strike for $1.55. If we are called that is a $2.77 gain on an $11 stock.
Buy-write ACHN Oct $12 Call, currently $10.78-$1.55, no stop
OCN - Ocwen Financial
OCN was crushed in early August and is finally starting to rebound after a month of consolidation. I am recommending a "at the money" October $27.50 call worth $1.85. That gives us protection against a decline to support at $26.
Buy-write OCN Oct $27.50 call, currently $27.51-$1.85, stop loss $24.65
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)
PRAN - Prana Biotech (Short Put - Update)
SCTY - SolarCity (Aggressive Short Put)
GILD - Gilead Sciences (Short Put)
SCTY - Solar City (Short Put)
GWPH - GW Pharma (Short Put)
YY - YY Inc (Short Put)
SRPT - Sarepta Therapeutics (Covered Call)
ISIS - ISIS Pharma (Covered Call)
INSY - Insys Therapeutics (Short Put)
AVGO - Avago Technologies (Short Put)
GTAT - GT Advanced Technologies (Covered Call)
NLNK - Newlink Genetics (Covered Call)
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.