It has been so long since we had a real bout of profit taking I almost did not recognize it.
Stocks sold off for multiple reasons if you believe the talking heads on TV but in reality it was just a pause for profit taking after a 28 day rally out of the October dip. The reasons given for the dip ranged from weak Black Friday sales to a continued decline from the OPEC decision on Friday.
I am sure there was some margin selling involved with investors forced to raise cash after the Friday carnage in the energy sector.
The biggest stock in the world declined -$8 at the open to sink the Nasdaq and setoff numerous sell programs and trigger sell stops all across the tech sector. Of course I am talking about Apple. There was a major sell program in the first ten minutes of trading that accounted for 35 million of the 80 million shares traded for the entire day. Average daily volume is about 55 million. This could have been an example of a large fund taking profits but more likely a liquidation by somebody that got caught holding a lot of crude futures when the market went south and they had to liquidate something to raise cash and do it in a hurry. There is no other logical reason why anyone would crash sell 20 million shares of Apple in the first 10 minutes of trading. Any rational process would have trickled the shares out a few thousand at a time all day to avoid impacting the stock price. This was a panic event of some sort.
The selloff in energy stocks gave me a lot of potential candidates for plays but I am not sure the damage is over. We had a snapback rally in crude to gain $3 after a -$7.70 drop on Friday. That is hardly a screaming buy signal. Some analysts are still calling for $50 before $80 so those negative outlooks will keep pressure on crude and energy stocks in the days ahead. They are so oversold we could see a snapback in stocks as well but we need to see if they are going to be sold again once they rebound.
December is normally bullish. The keyword there is "normally." There have been selloffs in December but they are rare. With the strong ISM Manufacturing report this morning the economic worries are slowly evaporating. This should be market positive.
Fund managers should be chasing performance the next several weeks because 85% of active managers are behind their benchmarks and bonuses are going to be slim if they don't catch up quick. Their time is running out.
Tighten your stop losses and let's try to avoid any big losses in December. If the Monday dip continues it could last the rest of the week.
Send Jim an email
Long Term Positions
Current Position Changes
UAL - United Airlines (Closed)
The UAL put was closed at the open on Tuesday as recommended. In retrospect we would have been safe to hold it but OPEC could just as easily have gone the other way.
Closed Dec $47 put, entry $1.70, exit .32, +1.38 gain.
DAL - Delta Airlines (Closed)
I recommended we close this airline play before the OPEC meeting.
Closed Dec $45 put, entry $2.52, exit $2.18, +.34 gain.
Leave the long Dec $40 put open just in case.
HPQ - Hewlett Packard (Closed)
HP had earnings after the close on Tuesday. I recommended we close the short put and retain the long put just in case of a disaster. That caution was misplaced when HPQ rallied $2 after earnings. Still, better safe than sorry.
Closed Dec $38 put, entry $1.87, currently $1.37, +.50 gain.
Retain long Dec $34 put, entry .38, currently .07, -.31 loss.
New Short Put Recommendations
MSFT - Microsoft (Put spread)
Microsoft is rebounding from a pre Thanksgiving dip and should retest the November highs at $50. The announced on Monday they acquired email startup Acompli after the independent app builder wrote an email app that interfaces beautifully with Microsoft Exchange and Apple iOS. We also found out on Monday that Windows 8 has finally surpassed Windows XP installations. The long lived XP has been a thorn in the side of Microsoft but finally consumers are upgrading in mass to Windows 8 with 18.7% market share in November compared to 13.6% for XP. Windows 7 is still the winner with 53.7%.
Buy Dec $48 put, currently .50, no stop.
Sell Dec $50 put, currently $1.64, no stop.
LNG - Cheniere Energy (Short Put)
Cheniere is building two LNG export facilities in Louisiana and Texas. They will be the biggest in the U.S. when completed. They are also the farthest along in the process with first exports possible at the end of 2015. Cheniere was sold hard on the OPEC news even though the price of oil is not relative to the price of gas and they are not yet exporting anyway. The OPEC decision has no impact on their business or profitability. Shares rebounded $3 at the close as investors jumped on this bargain opportunity.
Sell Jan $62.50 put, currently $2.55, no initial stop.
APOL - Apollo Group (Put spread)
Apollo shares have gone vertical since the October dip. Nothing has slowed them down even the Monday Nasdaq crash had no impact. I am recommending we do an ITM put spread.
Buy Dec $31 put, currently .50, no stop.
Sell Dec $34 put, currently $2.20, no stop.
INTC - Intel (put spread)
Intel has broken out to a new high on stronger than expected sales of PC chips and a continued market share gain in server chips. Intel is moving to take over the tablet market and they are branching out into several other chip component streams that they never produced before. They are on the move and the stock is rising. December should be good for Intel shares.
Buy Dec $36 put, currently $.26, no stop.
Sell short Dec $39 put, currently $1.81, no stop.
CDK - CDK Global (Short Put)
CDK IPOed in September at $30 followed by a quick crash to $25 in the October market meltdown. Shares recovered immediately to $42 and then pulled back over the last couple of weeks in a consolidation pattern. Today, in an ugly market they rallied out of that consolidation pattern by +3.6% on no news. Apparently the consolidation is over.
Sell short Dec $40 put, currently $1.30, stop $37.65
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)
CLVS - Clovis Oncology (Covered Jan Call)
UAL - United Continental (Short Put)
UPS - United Parcel (Short Put)
HD - Home Depot (Put spread)
DAL - Delta Airlines (Put spread)
HOG - Harley Davidson (Put spread)
HPQ - Hewlett Packard (Put spread)
CSC - Computer Sciences (Put spread)
UNG - Natural Gas ETF (Put spread)
ACHC - Acadia Healthcare (Put spread)
BHI - Baker Hughes (Covered Call)
XONE - Exone Co (Put spread)
WWWW - Web.com (Put spread)
KORS - Michael Kors (Put spread)
VJET - Voxeljet (Bearish call spread)
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.