Alternating triple digit moves on the Dow and multiple sector downgrades makes it very hard to be bullish. Monday's rebound was only a short squeeze thanks to China's reserve rate cut. Resistance was untouched today.
This is the hardest two weeks of the quarter to pick plays. 60% of the S&P report earnings this week and next. Add to that the 53% miss rate so far this quarter and the outlook is very choppy. Stir in the alternating triple digit moves on the Dow and the charts are mostly crap. That is a technical term for having no obvious direction.
I looked at more than 800 charts today and most had earnings over the next 3 weeks. After scanning that many charts I have serious doubts about market direction. As of late Monday evening the S&P futures are up +5 but that could erase or double by morning.
The problem I have with Monday's rebound is that it was just a short squeeze because China cut the reserve rate ratio for banks. That means the banks are free to loan that money and it will boost the economy in the months ahead. That has nothing to do with our markets today or over the next several months. Long term it will help the global economy but it does not help with Q2 earnings.
The Q1 earnings have actually been slightly better than expected but the estimates had been revised down so low that anyone could beat. Only "anyone" has not beaten with a 53% miss rate so far but that is mostly revenue misses because of the strong dollar. That kitchen sink excuse is being used by everyone so it no longer carries any weight. If you use the excuse your results are ignored. Think of it as a get out of jail free card.
Because of the multiple downgrades of the retail sector I was able to find some bear call spreads on companies that have earnings after May expiration. The sector has been decimated so we need to watch for "value" upgrades in the weeks ahead. When stocks reach a certain level the brokers love to go counter trend with upgrades just to get their name in print again.
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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
Friday was April option expiration. We has several positions expire in the portfolio. I am not going to supply a final reconcillation for each expired play. See the portfolio graphic above for a recap.
RGR - Sturm Ruger
We were stopped out of the short April $47.5 call on Ruger on Tuesday when Smith & Wesson guided higher for the quarter. The long call was exited at Thursday's close per the recommndation.
Closed Apr $47.50 short call, entry $3.70, exit .65, +$3.05 gain
Closed Apr $52.50 long call, entry $1.35, exit $1.55, +.20 gain
Net gain +3.25
VA - Virgin Airlines (Stopped)
Virgin rallied over the last week on no particular news to stop us out on Thursday. The long call expired on Friday.
Closed April $30 call, entry $2.53, exit .80, +1.73 gain.
April long $35 call, entry .48, expired .00, -.48 loss.
Net gain +1.25
AMBA - Ambarella (Stopped)
Ambarella lost nearly $3 in Friday's market drop and stopped us out at $72.45 for a small gain.
Closed May $45 Short Put, entry $3.00, exit $2.20, +.80 gain.
WWWW - Web.com (Stopped)
Web.com lost its upward momentum last week to stop us out on the short put. The long put expired on Friday.
Closed Short Apr $20 put, entry $1.60, exit $1.20, +.40 gain.
Closed Long Apr $17.5 put, entry .55, expired .00, -.55 loss.
Net loss .15
NUS - NuSkin (Stopped)
NuSkin was moving steadily higher until I picked it for a short put. Almost instantly it rolled over and fell back to a two-week low to stop us out.
Closed May $60 put, entry $1.70, exit $2.00, -.30 loss.
BHP - BHP Billiton (Stopped)
BHP rebounded on positive comments by Goldman about the steel sector and shares avoided a new 52-week low. We were stopped out on the gap higher on Tuesday. The long call is still open and up +$1 from our entry.
Closed May $40 call, entry $5.25, exit $6.40, -1.15 loss
Retain the long $45 call, entry $1.79, currently $2.69, +.90 gain.
BBY - Best Buy (Bear Call Spread)
Best Buy is in a confirmed downtrend along with all the other retail stocks. This sector is looking almost as bad as the energy sector did last fall. Support, and I use the term loosely here, is $34.
Earnings May 21st.
Sell short May $34 call, currently $2.75, initial stop loss $37.65
Buy long may $37 call, currently .81, no stop.
Net credit $1.94.
BIG - Big Lots (Bear call spread)
BIG is another retail stock in a dive with support at roughly $43. No real story here but more of a lack of a story to interest investors.
Earnings May 29th.
Sell short May $45 call, currently $2.30, initial stop loss $47.65
Buy long May $47 call, currently .95, no stop.
Net credit $1.35
WMT - Wal-Mart (Bear call spread)
Same story with Walmart. Sales are slipping, consumers are not shopping. Wages are slowing. Looks like it is headed for $75.
Earnings May 19th.
Sell short May $75 call, currently $3.20, initial stop loss $79.35
Buy long May $79 call, currently .69, no stop.
Net credit $2.51
LOW - Lowes Co. (Bear call spread)
Lowes is the opposite of the other retailers. It has been on a huge run for the last year and the momentum died in March. With no movement over the last two months investors are starting to take profits.
Earnings May 20th.
Sell short may $70 call, currently $3.10, initial stop loss $73.85
Buy long May $75 call, currently .44, no stop.
Net credit $2.66
New Covered Call Recommendations
New Aggressive Recommendations
CLDN - Cellador Corp (covered call)
This is a very aggressive suggestion. I am not making it an official recommendation but the premium was too high for me to pass it up. This is a biotech stock with some trial results on a cancer drug due out in "late April." The results are expected to be positive but investors are taking profits ahead of the event. If the results are positive we could see a huge spike. If they are negative it could retest $10. An aggressive trader can sell the $20 call for $5.20 and make more than $10 on positive results. If the results are less than positive and the stock drops to $10 you keep the $5.80 premium and write a new call. At $10 you are still even with no loss. The losses start if the stock drops under $10.
Earnings are June 30th.
Buy-write the May $20 call, currently $15.67-$5.20
Gain if called $10.53
New Long Term Recommendations
Existing Play Recommendations
Links to original play recommendation
BHI - Baker Hughes (Covered Call)
HPQ - Hewlett Packard (Bear call spread)
TASR - Taser Intl (Bear call spread)
IM - Ingram Micro (Bear call spread)
CRTO - Criteo SA (Put spread)
RGR - Sturm Ruger (Put spread)
SFM - Sprouts farmers Market (Bear call spread)
VA - Virgin Airlines (Bear call spread)
WWWW - Web.com (Put spread)
AMBA - Ambarella (Short Put)
KORS - Michael Kors (Bear call Spread)
NUS - NuSkin (Short Put)
SRPT - Sarepta (Covered Call)
APOL - Apollo Education Group (Bear call Spread)
BHP - BHP Billiton (Bear call Spread)
LGF - Lions Gate Ent (Bear call Spread)
NLNK - NewLink Genetics (Short Put)
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.