Stocks seem to have a bipolar personality as April progresses. The majority are declining with only a few leaders offsetting those declines. Sectors are rotating on a daily basis and small caps are no longer in favor. Everyone seems to be running in opposite directions.

The Nasdaq and S&P set new highs on Friday and closed well off those highs on Monday. Apple reported earnings after the bell and although it easily beat the futures turned negative almost immediately after the close of the afterhours session. However, down -3 on the S&P futures is hardly a real warning of another negative day ahead.

The most likely scenario is that traders are taking profits after the new highs since only four stocks led the Nasdaq to those highs. With the FOMC meeting announcement on Wednesday and the sell in May cycle upon us there is no particular reason for investors to continue buying stocks just because they have cash in their accounts. This is a wait and see week.

We were blown out of half our positions last week when the euphoria over some positive earnings saw gains in all sectors. Those that had been declining rebounded and those that were strong became stronger. The various earnings reports also impacted our plays as stocks in the same sector either rallied or declined and our positions were caught in the flow. If you look at the charts on the plays that were stopped every one rolled over almost immediately.

We were stopped out of LOW and LGF on a 2 day rebound from oversold conditions in a market rally. I am recommending we reenter the short side in each of those plays. We still have the long side open.

We were stopped out of BHP back on April 14th but retained the long side, which happened to be calls. Those calls are now up more than double with nearly a $5 gain. I put a stop loss on that long side to prevent giving back any of our profit. It doesn't take but a couple of these busted plays to run away in the right direction to recover a lot of the small losses we take when we are stopped out. The calls on our busted WMT/LGF plays are also in the green.

The BHI position continues to improve. At the close today the HAL buyout is worth $73.41 and rising. We are holding the BHI shares after writing two covered calls with a cost basis of $62.13. If oil continues to rise we could end up with more than a $10 gain on that position.

Another bright side is that we only had one biotech position today and the biotechs were hammered for a -4% decline. Normally we would have had several in the portfolio.

Earnings should be over in two weeks and we will start writing June positions next week. Hopefully the market will be directional to some extent.

Jim Brown

Send Jim an email



Current Portfolio


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 positions

Covered Calls


Current Position Changes


NLNK - NewLink Genetics (Stopped)

We were stopped out of the short May $45 put when the biotech sector imploded today. Newlinks shares declined -3.87 but we were stopped out well above that level at $51.75 for a decent profit.

Short May $45 put, entry $3.40, exit $1.48, +1.92 gain.



WMT - Walmart (Stopped)

Walmart spiked on the 23rd to stop us out at $79.35 for a breakeven. The long side of the spread is still open.

Short May $75 call, entry $3.45, exit $3.45, no gain.
Retain the long May $79 call, entry .85, currently $1.05.



BIG - Big Lots (Stopped)

BIG rebounded from $46 to stop us out at $46.75 before rolling over again. The long side is still open.

Short May $45 call, entry $2.51, exit $2.75, -.24 loss
Retain long May $47.50 call, entry .85, currently .80



LGF - Lions Gate (Stopped)

Lions Gate rallied for two days with the market and stopped us out at $31.85. The long side is still open.

Short May $28 call, entry $3.21, exit $4.00, -.79
Retain long May $31 call, entry 1.08, currently $1.20



LOW - Lowes Co. (Stopped)

LOW spiked intraday on the 23rd to stop us out of the short call just before the stock rolled over and broke below support. The long call is still open.

Short May $70 call, enrty $3.21, exit $4.07, -.86.
Retain long May $75 call, entry .49, currently ,17.



New Recommendations


LOW - Lowes Cos (Bear Call Spread)

I am recommending we reenter the short May $70 call on LOW. We were stopped out just before it rolled over and has now broken critical support.

Earnings May 20th.

Sell short may $70 call, currently $2.32, initial stop loss $72.85
We are currently long May $75 call, @ .49, no stop.



LGF - Lions Gate (Bear call spread)

Lions Gate rallied for two days with the market and stopped us out at $31.85. The long side is still open. I am recommending we reenter the short side with the May $28 call.

Earnings May 28th.

Short May $28 call, currently $3.70, stop loss $32.75
Retain existing long May $31 call, entry 1.08, currently $1.20



LEN - Lennar Corp (Bear call spread)

Home builders are sinking and especially Lennar. Pulte Group reported a sharp rise in costs last week and new home sales were weak. This has the builders on the skids.

Earnings June 18th.

Sell short May $45 call, currently $1.92, stop loss $47.85
Buy long May $48 call, currently .49, no stop.
Net credit $1.43



RCL - Royal Caribbean (Bear call spread)

Royal Caribbean reported earnings that beat on earnings but missed on revenue. The real problem came when they lowered guidance for the rest of the year because of the dollar and rising fuel costs. They had projected better numbers just three months ago.

Earnings July 20th.

Sell short May $67.50 call, currently $3.45, stop loss $74.45
Buy long May $72.50 call, currently .91, no stop.
Net credit $2.44



New Covered Call Recommendations


None


New Aggressive Recommendations


None


New Long Term Recommendations


None


Existing Play Recommendations


Links to original play recommendation

BHI - Baker Hughes (Covered Call)

KORS - Michael Kors (Bear call Spread)

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)

BBY - Best Buy (Bear call Spread)

BIG - Big Lots (Bear call Spread)

WMT - Walmart (Bear call Spread)

LOW - Lowes Co (Bear call Spread)


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.