Monday was the poster child for volatility with a drop of -127 points at the open and a high of +205 points just before the close. The Dow was negative as late as 2:PM before a buy program triggered a short squeeze. The VIX traded as high as 22.81 before fading into the close.
So far this year the volatility has been huge. Since mid December when the VIX hit 25 it has been a series of lower highs but also higher lows. The last dip only declined to 15.52 before ricketing back off to nearly 23.
In theory this high volatility should spike option premiums but in reality the stock charts are so volatile there is no real trend to play. The S&P futures are down more than -5 again tonight so the short squeeze gains may not hold.
The weak economics and earnings guidance is weighing on equities and treasuries are holding at multi-year low yields. The market appears to be setting up for another leg down. However, crude prices actually traded over $50 this evening and that +11% gain over the last three days helped to lift energy equities and added to the market rebound.
Most analysts believe crude will still test the high $30s so this short squeeze in crude could also fail. I am hesitant to add too many positions because the volatility has been costing us money with the erratic stock behavior. There is no need to trade just to be trading.
I added a column to the portfolio graphic for the earnings date. We will always exit a position before that date unless specifically mentioned otherwise in the play description. For the plays where we will not exit I added the No-X designation in the portfolio.
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Current Position Changes
GILD - Gilead Sciences (Closed)
The premium on the Feb $85 put had evaporated to only 40 cents and there was no reason to leave the position open with earnings this week. I recommended we close the play last week.
Closed Feb $85 Put, entry $3.00, exit .40, +2.60 gain.
GWPH - GW Pharma (Close)
GWPH has earnings on Thursday and we do not want to hold over that event. Close the GWPH position at the open on Tuesday.
Close Feb $65 put, entry $3.40, currently $1.10, +2.30 gain.
LNG - Cheniere Energy (Closed)
LNG shares dipped with the price of oil last week even though low oil prices are beneficial for Cheniere and their pricing of LNG contracts. Don't look for logic in the stock market. We were stopped at $70.35 on the 29th.
Closed Feb $65 put, entry $1.55, exit $1.48, -7 cent loss.
CGNX - Cognex (Closed)
The remaining long call on CGNX was closed at the open on the 27th. Unfortunately the stock gapped down on Tuesday and cut the call premium by about 40 cents.
Closed Short Feb $35 call, entry $3.64, exit $4.00, -.36 loss
Closed Long Feb $40 call, entry $1.00, exit $1.05, +.05 gain
Net loss 31 cents.
FCX - Freeport McMoran (Put Spread)
Freeport reported earnings last Tuesday that missed on earnings per share and beat on revenue. They announced a major capex reduction in both mining and oil exploration. Copper is their number one products and copper prices have declined to a post recession low at $2.45. At this price many of the smaller miners can't make any money and they are forced to shut down production until prices rise. Part of Freeport's earnings decline came lower production as a result of selling mines and because of work stoppages in Indonesia due to random events that will not happen again in 2015. They just signed a new deal to build a major smelter in Indonesia and that demand by the government is not behind them.
Shares of Freeport hit a post recession low last week at $16.43 on post earnings depression. I believe the earnings impact is now over and shares will begin to recover some lost ground. Copper can't go materially lower because of the mine curtailments around the world. China is preparing to add additional stimulus covering more than 1,000 infrastructure projects. Copper demand is going to rise along with copper prices. I believe the worst is over for FCX.
Sell Short March $19 put, currently $2.06, stop loss $16.25
Buy Long March $16 put, currently .59, no stop.
ATI - Allegheny Technologies (put spread)
ATI reported earnings that declined -87% but still beat estimates for Q4. Revenue for the year rose +4% to $4.22 billion. ATI is a producer of steel and specialty metals. They reported a backlog of $1.7 billion. The year 2014 was a transitioning year for them into more specialty metals and less of the common and low margin items. In Q4 they received approval for their titanium sponge facility and as a result received several long term agreements as a supplier for jet engines. There were numerous similar items where ATI has moved into new markets or upgraded product capabilities. In 2014 34% of ATI sales were into aerospace markets, 18% into the oil and gas chemical processing industry, 10% into electrical energy market and 5% into medical equipment. Direct international sales represented 38%.
ATI shares sold off in early January and built a base just above $27. The stock moves sideways into late January before beginning to rise last week. I believe the base will hold and based on the news the stock is due for a comeback.
Earnings April 22nd.
This would also work as a covered call with the March $30 call at $1.10.
Sell March $30 put, currently $2.15, stop loss $26.95
Buy March $25 put, currently .50, no stop.
New Covered Call Recommendations
CSIQ - Canadian Solar
Canadian Solar is experiencing explosive growth since their entry into the large scale project market place in 2009. The company designs and builds large scale solar power plants and once completed they look for opportunities to monetize these assets rather than holding them long term. Obviously a fully functioning solar power plant is far more valuable than one in the design phase.
On Thursday they updated the market on their current backlogs and future orders. They currently have 1.4 gigawatts of projects either in construction or about to begin construction worldwide. They delivered 409 megawatts of completed projects in 2014. About 275 megawatts of plants have already been completed and sold and they will recognize the revenue in Q1. In Japan they have 606 megawatts in the late stage pipeline with 262 megawatts already receiving approval for connection to the electric grid. In China they have 320 megawatts in the pipeline with 100 megawatts already operating and generating revenue while CSIQ looks for an opportunity to monetize the projects.
In the past 14 years CSIQ has delivered more than 8 gigawatts of modules in over 70 countries.
Shares of CSIQ rallied 4.5% on Monday and should continue to climb thanks to the strong pipeline.
Earnings March 4th AM and we will close this position before then.
Buy-write CSIQ March $24 call, currently $21.32-$1.10, no stop.
Gain if called $3.78
New Aggressive Recommendations
New Long Term Recommendations
Existing Play Recommendations
Links to original play recommendation
BHI - Baker Hughes (Covered Call)
OVX - Oil Volatlity Index (Bearish call spread)
GILD - Gilead Sciences (Short Put)
SRPT - Sarepta Therapeutics (Covered Call)
NPSP - NPS Pharma (Covered Call)
GWPH - GW Pharma (Short Put)
CGNX - Cognex (Call Spread)
FIVE - Five Below (Call Spread)
LNG - Cheniere Energy (Short Put)
GOGO - Gogo Inc (Call Spread)
SODA - Sodastream (Call Spread)
FUEL - Rocket Fuel (Call Spread)
XOP - Exploration ETF (Short Put)
TFM - Fresh Market (Short Put)
SFM - Sprouts Farmers Market (Put Spread)
INFY - InfoSys (Put 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.