After more than 1,000 days without a correction everyone knew it would eventually appear.
While the big caps have not yet reached correction territory with the Dow down only about -6% the small and midcaps are already well into correction territory with the Russell 2000 down -13%.
Nothing has been safe in the market. The warning last week from Microchip of a semiconductor sector correction, which normally takes 2-3 quarters, has poisoned the entire tech sector. The Fed's warning about growing weakness in Europe and China and the potential impact on the U.S. economy is also a storm cloud over the markets.
The assumed end of QE on October 29th is also a destabilizing influence on the markets. The end of more than $3 trillion in QE is a potential turning point for equities. Coming at a time when the rest of the global economy is slowing with Europe falling back into its third recession since 2008 makes it even worse.
Selling premium is a bullish strategy for bullish markets. With the market reversing a midday gain and then accelerating to new lows at the close I don't think this qualifies as a bullish market. This market has exceeded the qualifications to be called bearish and we need to stand aside and let the dust settle.
We were stopped out of the majority of our positions and I am recommending we close a couple others. There is no reason to leave ourselves at risk of a continued decline.
The only play I am recommending tonight is a bearish call spread on the Volatility Index ($VIX). The superspike today to more than 24 is a rare occurrence and one that normally lasts only a few days to several weeks. The premiums are super inflated and we can enter the position with very little risk.
Send Jim an email
Long Term Positions
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.
FB - Oct-29th
ATK - Oct-30th
CLVS - Oct-30th
SPLK - Nov 20th
LOCO - UNK
PRAN - UNK
TKMR - Tekmira Pharma (Closed 10/7)
TKMR was closed last Tuesday at the open as recommended.
Closed Oct $17.5 put, entry $1.70, exit .15, +1.55 gain
TKMR - Tekmira Pharma (Covered Call Close)
Despite the relative strength of TKMR last week the dip to $21.75 on Wednesday shows it is vulnerable to the market. I am recommending we close the covered call while we still have a profit.
Close TKMR shares, entry $20.85, currently $23.69, +2.84 gain.
Close Oct $22.5 call, entry $2.50, currently $2.15, +.50 gain.
Net gain +3.34
AMBA - Ambarella (Stopped 10/10)
The chip sector imploded with the Microchip warning on a sector correction. I still believe it will reach new highs but the sector sentiment has to improve first. When it does AMBA will probably be a leader out of the decline.
Closed Nov $36 Put, entry $1.70, exit $1.50, +.20 gain.
INSY - Insys Therapeutics (Stopped 10/13)
When the market hit new lows today the support at $37.50 failed and we were stopped out of this position.
Closed Nov $35 put, entry $2.00, exit $3.20, -$1.20 loss
GPRO - GoPro (Closed)
The October $50 put position had declined to 10 cents and there was no reason to keep it open. I recommended last Monday to close the October position and leave the November position open.
The upward momentum finally died on Friday and turned into a dramatic drop today to stop us out of the November position.
Both were nicely profitable.
Closes Oct $50 put, entry $2.10, exit .07, +2.03 gain.
Stopped Nov $60 put, entry $6.77, exit $3.09, +3.68 gain.
MBLY - Mobileye (Stopped 10/10)
Mobileye went from winner to sinner on the Microchip warning last Friday. Shares plunged -$12 in two days. It is not a fundamental problem with Mobileye but a sentiment problem with the sector.
Closed Nov $43 put, entry $1.85, exit $1.70, -.15 loss.
ISIS - ISIS Pharma (Covered Call Close)
ISIS shares are weakening and I am recommending we close the covered call while we still have a profit.
Close ISIS shares, entry $34.80, currently $36.58, +1.78 gain.
Close Oct $38 call, entry $2.50, currently $.75, +1.75 gain.
Net gain +3.53
New Short Put Recommendations
New Covered Call Recommendations
New Aggressive Recommendations
VIX Bearish Call Spread
With the VIX superspike today to 24.64 I want to initiate a bearish call spread using the November calls. The spikes to these levels rarely last more than a couple days or a couple weeks at most before returning to a reasonable level.
Sell short Nov $16 call, currently $5.60
Buy Long Nov 26 call, currently $2.19
Net credit $3.41
New Long Term Recommendations
Existing Play Recommendations
Links to original play recommendation
CLVS - Clovis Oncology (Aggressive Covered Call)
CLVS - Clovis Oncology (Update Existing Position)
CLVS - Clovis Oncology (Covered Jan Call)
FB - Facebook (Long Term Short Put)
PRAN - Prana Biotech (Short Put - Update)
SRPT - Sarepta Therapeutics (Covered Call)
ISIS - ISIS Pharma (Covered Call)
TKMR - Tekmira Pharma (Short Put)
TKMR - Tekmira Pharma (Covered Call)
AMBA - Ambarella (Short Put)
GPRO - GoPro (Aggressive Short Put)
MBLY - Mobileye (Aggressive Short Put)
INSY - Insys Therapeutics (Short Put)
ATK - Alliant Techsystems (Short Put)
SPLK - Splunk (Short Put)
LOCO - el Pollo Loco (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.