Apparently investors are busting out with euphoria this holiday season and the bulls were charging ahead on Monday. Let's hope there is not a cliff in front of them.
The Dow and S&P both closed at new highs by slim margins but they are still new highs. The futures are positive on Monday night and it would appear Christmas week will follow the historical trend of bullishness with some minor gains.
I was pleased to see the market did not take profits on Monday after the big rebound from last week. That suggests we could see the gains continue the rest of the week.
The December market crash was expensive. We had a lot good positions going into December but the -5% drop in the markets in only 7 days killed us. We have to take the bad with the good and move on to the next cycle. We have about four weeks before the Q1 earnings begin. Unfortunately it is only three weeks until January expiration. That means we will have to step out to February options and make sure we close the position before earnings.
There is also the strong possibility of another market dip after option expiration in January. The early part of January is typically bullish as end of year bonuses are put to work in the market and funds launch new positions using end of year retirement inflows.
With the VIX collapsing the option premiums are declining as well. Unfortunately the Oil Vix ($OVX) has not yet begun its decline although it has stopped moving higher. Once oil prices find a bottom I expect the OVX to decline fairly rapidly from its three-year highs.
Volume should be light the rest of the week so don't expect any major trends to develop. Monday should have been the highest volume of the week and it was only 5.6 billion shares compared to 11 billion on Friday. The rest of the week will be very light.
I am not going to do an end of play summary on every December position. There are far too many of them. The portfolio graphic contains all the gory details.
Send Jim an email
Long Term Positions
Current Position Changes
SNDK - SanDisk (close)
We had a put spread on SNDK when the market knocked the semiconductor for a loss in the December decline. We were stopped out of the short put at the lows in the market on Tuesday. Shares have been rebounding steadily ever since.
The long put portion of the play still has value but with SNDK shares rising we need to close it now.
Close Long Jan $97.50 put, entry $1.61, currently $1.89, +.28 gain.
HLF - Herbalife (Bear call spread)
Herbalife is not enjoying the market rebound. The brief amount of short covering after the market lows last week was over in a hurry. Herbalife is in a long term decline as more government agencies pursue inquiries into the Herbalife business practices.
I am proposing a bear call spread on HLF with the expectation we will see new lows in January.
Sell Jan $35 call, currently $4.25, no stop.
Buy Jan $40 call, currently $1.90, no stop.
Net credit $2.35
PANW - Palo Alto Networks (Short Put)
The Sony hacking scandal has given a lift to all the network security stocks. Palo Alto is being called the best of the best by experts and network security analysts. Shares spiked to a new high on the Sony news last week. I am recommending a short January put $6 OTM.
You could go out to February for a lot more premium but that would expose you to any late January volatility and the earnings parade.
Sell Jan $120 put, currently $2.30, stop loss $121.85
GILD - Gilead Sciences (Short Put)
Gilead was crushed by news on Monday that Express Scripts had negotiated a deal with Hep-C competitor AbbVie (ABBV) for a sole source supplier for Hep-C medicine. This is expected to reduce Gilead's market share in 2015 from 80% to 70%. Revenue from the Hep-C drug is expected to decline from $18 billion to $15 billion. Since they had ZERO revenue in 2013 and only about $5 billion in 2014 that is still a huge revenue boost.
I believe Gilead will decline again on Tuesday and probably find a bottom around $90. They are still going to grow revenue by 300% or more and multiple analysts came out on Monday saying this was a knee jerk reaction, selling was overdone and this was a buying opportunity.
The 200-day average should be support at $91.74.
Sell Feb $85 put, currently $2.85, no initial stop because of potential volatility on Tuesday.
New Covered Call Recommendations
ONVO - Organovo Holdings
This is an amazing company. They are actually printing human organs using the 3D process and human stem cells. These are not fully functioning organs for implanting in the human body but they are functioning to the point that new drugs can be tested in the laboratory instead of costly human trials. The results are much faster and more comprehensive since they can actually look at the effects on the human tissue rather than depend on post test blood tests from human trials.
They have already helped partners (drug companies) identify problems in weeks rather than months with potential new drugs. This company is going to be huge in the not too distant future. I would recommend everyone buy a few of these shares in your IRA and forget them.
We ar enot going to make a lot off the premium but I do expect to be called away for a profit.
Buy-write ONVO Feb $8 call, currently $7.08-0.40, no stop loss.
Net gain if called $1.32 or 33% on margin.
EXAS - Exact Sciences
EXAS experienced some volatility on Friday after Medicare announced a low reimbursement rate for their new Cologuard drug of $500.76. The company is working with Medicare to clarify why the reimbursement rate did not conform to what Medicare had previously indicated. On the positive side they did agree to reimburse for this new drug so EXAS still won the battle and they will continue to press for a higher reimbursement.
The news caused a temporary decline in the stock which was almost erased today. Support is $25.
I am going in the money on this call to give us the best protection against a decline.
Buy-write EXAS Jan $27 call, currently $27.72-$1.70, stop loss $24.95.
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)
HD - Home Depot (Put spread)
HOG - Harley Davidson (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)
MSFT - Microsoft (Put spread)
LNG - Cheniere Energy (Short Put)
APOL - Apollo Group (Put spread)
INTC - Intel Inc (Put spread)
CDK - CDK Global (Short Put)
VIX - Volatlity Index (Bearish call spread)
OVX - Oil Volatlity Index (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.