Last week's market decline was better than a trip to the dentist but not by much. Previously bullish stocks reversed and many chart patterns were broken. Monday's rally gave traders hope but that was never a good trading strategy.
Last week's market decline was painful. Numerous positions were stopped out after their uptrends were trashed. The declines were not really that bad but they were generally across the board. No sector was spared.
This week the Dow opened higher and the Nasdaq finally recovered from losses to close the day higher. The S&P cooperated but it was not a strong day.
I was struck by the number of ugly charts when I was doing my research today. The Russell 2000 posted a decent gain but I only saw about 2 out of every 20 charts that were actually higher on the day by more than a few cents. For a stock that declined -$3 last week to be up 20 cents today it is not a strong vote of confidence.
I think today may have been just a dead cat bounce. While we won't know until Tuesday's close I am concerned we could be in for more selling. I said in the Ultimate Investor tonight that I expected the market to be muted until the FOMC announcement next Wednesday. The rate hike fear is strong but unwarranted. Even if they hike rates in June it will be by a miniscule amount and everyone has known this was coming for at least a year. I personally don't think they will hike in June and I do expect them to add some calming comments to the next FOMC statement on Wednesday.
I found what appears to be some good call spread candidates this week. They are trending down regardless of what they market has been doing. Stocks disappointing on earnings and guidance are being dumped by investors as we head into the normally weak period after March option expirations.
We have accumulated a lot of leftover long calls and puts after the primary short position has been stopped out. If the market continues lower we could see several of them deep in the money. The long put on Rock-Tenn is now $5.80 after our entry at $1.34. That is a pretty good return on a busted play. I hope we are that lucky on several more before the March expiration in two weeks.
I said last week, "Don't initiate new plays unless the market is positive at the open," and the first positive open we got was on Thursday. Two of our candidates were already below the stop losses and should not have been opened.
I am not going to say that this week because all the plays are bear call spreads. However, if the futures are strongly positive at the open I would exercise judgment in adding those positions. I believe the stocks mentioned are negative enough that we don't need to worry about a positive print on the first day so they are all going live at the open. In the future I am going to add trade triggers to initiate the plays. There is nothing I hate more than to recommend a play on Monday night and have the stock gap in the opposite direction at the open. I know readers are not adding the plays if that happens but I have to add them anyway for the newsletter. Trading does require some common sense.
Send Jim an email
The fourth column in the portfolio graphic is 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.
Current Position Changes
DHI - DR Horton (Stopped)
The short put on DHI was stopped out on March 3rd at $28.65. The long put is still open and DHI is declining.
Closed short Mar $28 put, entry $1.92, exit $1.56, +.36 gain.
Retain long Mar $25 put, entry .52, currently .17
MSFT - Microsoft (Stopped)
The short put on Microsoft was stopped at $43.45 on March 3rd. The long put is still open.
Closed March $45 put, entry $1.57, exit $1.65, -.08 loss.
Retain long March $42 put, entry .32, currently .22
CSCO - Cisco Systems (stopped)
The short March $32 put was stopped on March 4th at $29.25 and the long put remains open.
Closed March $32 put, entry $2.40, exit $2.70, -.30 loss.
Retain long March $29 put, entry .36, currently .24
VA - Virgin Air (Stopped)
Shares of VA rolled over on Friday and dipped even lower today to stop us out of the short put at $34.85. The long put is still open.
Closed March $40 short put, entry $3.81, exit $5.10, -1.29 loss.
Retain the long March $35 put, entry $1.30, currently $1.20
CDW - CDW Corp (Stopped)
The short put on CDW was stopped out on Friday at $37.25. The long put is still open.
Closed Short Mar $40 put, entry $2.34, exit $2.90, -.56 loss.
Retain the long March $35 put, entry .34, currently .25.
INFA - Informatica (Stopped)
INFA declined to $42.85 on march 3rd to stop us out of the short put. The long put is still open.
Closed Mar $45 put, entry $2.83, exit $2.55, +.28 gain.
Retain long March $40 put, entry .63, currently .10.
UBNT - Ubiquiti Networks (Stopped)
The covered call on UBNT was stopped out when the stock declined to $30.25 today.
Closed UBNT shares, entry $31.84, exit $30.25, -1.59 loss
Closed Apr $34 call, entry .90, exit .60, +.30 gain.
Net loss $1.29.
RAIL - FreightCar America (Not opened)
The first positive market open was on Thursday and RAIL opened below the stop loss of $29.65 and the play was not opened.
TRN - Trinity Industries (Not opened)
The first positive market open was on Thursday and TRN opened below the stop loss of $32.90 and the play was not opened.
HPQ - Hewlett Packard (Call Spread)
Hewlett disappointed on earnings and warned they could see $1.5 billion in currency issues in 2015. Shares gapped lower and have not looked back. Support is $31.75 with the stock at $33 today but I think it is going lower based on the negative outlook.
Sell short April $30 call, currently $3.00, stop $34.45
Buy long April $33 call, currently $1.02, no stop.
Net credit $1.98.
TASR - Taser Intl (Call spread)
Taser disappointed on earnings and has been trending lower. Taser is a cult stock and I think all the groupies have fallen away and shares are going to trade lower after the big Q4 rally.
Sell short April $20 call, currently $2.50, stop loss $23.25
Buy long April $23 call, currently $1.05. no stop.
Net credit $1.45.
IM - Ingram Micro (Call spread)
Ingram disappointed on earnings and warned on guidance. Shares gapped lower and appear headed for the October low at $22. There is no support between today's close and that October low.
Sell short April $22 calls, currently $2.35, stop loss $25.15
Buy long April $25 calls, currently .50, no stop.
Net credit $1.85.
FIVE - Five Below (Call spread)
We already have a successful call spread on FIVE but the rate of decline has accelerated and it is at a multi-year low. I think we could easily see $20 or lower.
Sell short April $25 call, currently $4.30, stop $29.65
Buy long April $30 call, currently $1.35, no stop.
Net credit $2.95
New Covered Call Recommendations
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)
OVX - Oil Volatlity Index (Bearish call spread - part 2)
FCX - Freeport McMoran (Put Spread)
CSIQ - Canadian Solar (Covered Call)
DHI - DR Horton (Put Spread)
INFA - Informatica (Put Spread)
INTC - Intel (Put spread)
CREE - Cree Inc (Put spread)
ACAT - Arctic Cat (Put spread)
MSFT - Microsoft (Put spread)
RKT - Rock-Tenn (Put spread)
CSCO - Cisco Systems (Put spread)
VA - Virgin America (Put spread)
CDW - CDW Corp (Put spread)
FIVE - Five Below (Bear call spread)
RAIL - FreightCar America (Put spread)
SPWR - SunPower (Short put)
TRN - Trinity Industries (Short put)
CSIQ - Canadian Solar (Covered Call)
UBNT - Ubiquiti Networks (Covered Call)
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.