If investors want to close losing positions to cover capital gains in other stocks they are running out of time with only two days left in 2014. This could provide some volatility over the rest of the week.

I considered not adding any plays today because of the potential for choppy trading the rest of the week and the potential for a significant decline in January. Instead I tried to choose low dollar stocks that could be caught up in the small cap rally that normally occurs in the first two weeks of the new year.

The Dow was weak on Monday with 18 Dow stocks losing ground. The S&P gained less than 2 points but it was still a gain. The Russell 2000 added +4 and was the best performing index. That suggests the small caps are going to perform as normal and we could see a 1.5% to 3% gain over the next two weeks.

Over the last five years January has been bullish three times and bearish twice. On the two occasions where declines appeared they came the week after option expiration. For that reason i would be hesitant to add any new positions that expire after January.

We were knocked out of PANW today when the stock fell -4.50 on no news. This is the kind of unexplained events that can happen in a low volume market when tax sellers are active.

Futures are up +2 late Monday night so maybe we will see a positive market on Tuesday. The Dow has been struggling for the last four days and the selling at the close today was troubling. I would be cautious on entering new positions unless the market is rising on decent volume.

Jim Brown

Send Jim an email



Current Portfolio


Current positions

Covered Calls

Long Term Positions


Current Position Changes



SODA - Sodastream (Stopped)

The bearish call spread we had on SODA was stopped out on the 23rd when SODA rose to our stop loss at $21.85. The high on the 23rd was $21.86 to knock us out by a two cents.

The stock is still going nowhere but there is a small upward bias. We will keep the long Jan $22.50 call just in case it picks up speed to the upside.

Closed Short Jan $17.50 call, entry $3.00, exit $4.50, -1.50 loss.
Maintain long Jan $22.50 call, entry .80, currently .50.



PANW - Palo Alto Networks (Stopped)

Palo Alto crashed on Monday with a -4.50 loss on no specific news. We were stopped out at $121.85 for a minor loss.

Closed Jan $120 put, entry $2.30, exit $3.00, -.70 loss.



New Recommendations


SFM - Sprouts Farmers Market (Short Put)

Sprouts has been consolidating for months and is on the verge of breaking out to a new 8 month high this week. They have cheaper prices than Whole Foods and a broad selection. They are taking market share away from the expensive competition. I expect them to break over $33 and retest the April highs at $38 over the next couple months.

They are a small stock but not quite a small cap. I am betting they will get swept up in the small cap buying over the next two weeks.

Sell short Jan $35 put, currently $2.10, stop $31.15



ANET - Arista Networks (Bear call Spread)

ANET broke down on Monday from an already bearish pattern. The close was the lowest since June when the stock came public. I believe we are going to see lower lows, possibly to $55 where it started trading.

If you want to be a little more aggressive I would sell the Jan $55 call.

Sell short Jan $60 call, currently $3.10, no initial stop.
Buy long Jan $65 call, currently $1.35, no initial stop.



New Covered Call Recommendations


SRPT - Sarepta Therapeutics

SRPT crashed in November and December and appears to have put in a double bottom at $12.50 and has rebounded +$2 from there. The last drop in December was related more to sector weakness than individual stock news. I am willing to take a short term covered call here with the expectations that small caps normally rally into January option expiration.

Buy-write SRPT Jan $15 call, currently $14.48-.70, no stop.
Gain if called $1.22.



NPSP - NPS Pharma

NPS has also been consolidating for months but began a rebound in October. The stock closed at a new 10-month high on Monday. Resistance at $37 is about to fail and the next material resistance if $39 and a historic high.

Buy-write NPS - Jan $38 call, currently $36.96-1.45, stop $34.45
Gain if called $2.49.



New Aggressive Recommendations


None


New Long Term Recommendations


None


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)

BHI - Baker Hughes (Covered Call)

NGVC - Natural Grocers VC (Put spread)

SODA - Sodastream (Bearish Call Spread)

VIX - Volatlity Index (Bearish call spread)

OVX - Oil Volatlity Index (Bearish call spread)

PANW - Palo Alto Networks (Short Put)

HLF - Herbalife (Bear Call Spread)

GILD - Gilead Sciences (Short Put)

ONVO - Organovo Holdings (Covered Call)

EXAS - Exact Sciences (Covered Call)


Margin Requirements:

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.