Our fortune this week was not exciting. It was not guaranteed Lotto numbers or news that some relative was pregnant. Our fortune from last week was ugly and we should have left the cookie alone.
The market has now declined for five consecutive days and we closed near the lows of the day. The -8.48% decline in the Shanghai Composite overnight added to the general negativity in the U.S. as a result of weak earnings and economics. The Dow was down -174 at the open to 17,400 and it clawed back somewhat but still lost -128 on the day and at a six-month low. We definitely did not get the cookie that said "good fortunes await those that sell premium."
We were stopped out of almost all our plays as the market went from testing new highs to retesting the July lows in only five days.
The volatility bit us in both directions and both call spreads and put spreads were stopped.
S&P futures are up +5.00 at 11:PM ET suggesting we could have a short squeeze at the open. The Shanghai Composite is down about 3% as I write this so anything is possible for Tuesday and the rest of the week.
I only added one play but I did recommend reloading a couple of the plays that were stopped out.
With the Dow down about -650 points from the prior week and the S&P resting on the 200-day average, we could have a monster short squeeze at any time. The earnings this week and the Fed announcement on Wednesday could accelerate that squeeze or kill it by giving the bears something to cheer about. I would rather not add a bunch of plays when the market is in coin toss mode for direction.
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
SLB - Schlumberger (Stopped/Reload)
SLB spiked up to $85.29 on the expiration spike in crude futures on the 21st to knocks us out of the first short call. I reloaded that position last Tuesday and SLB spiked up again on Thursday to knock us out again before falling -$5 to close under $82 today.
I am going to try this one more time. We already have a long August $90 call in place so I am going to sell short the August $95 in hopes of recovering our losses from the first two positions.
Sell short August $85 call, currently $.90, stop loss $83.85
Retain long August $90 call, entry .32, no stop.
Closed 7/23: Short August $86 call, entry $1.44, exit $2.11, -.67 loss.
Closed 7/21: Short August $86 call, entry $1.25, exit $1.70, -.45 loss.
LULU - LuluLemon (Stopped/Reload)
The short call on LULU was stopped out on the 23rd on an earnings beat from UnderArmour. Apparently because they are in the same retail space investors thought LULU was also a winner. That spike lasted only a few minutes before LULU rolled over and crashed back to a new low. We exited with a minor profit but I am going to reload this play and try to squeeze a few more cents out of the play.
Sell short August $65 call, currently 55 cents. Stop loss $63.35
Retain existing August $75 long call, entry 33 cents.
Closed August $70 short call, entry .84, exit .39, +.45 gain.
BOBE - Bob Evans Farms (Stopped)
Bob Evans was in an uptrend until Thursday morning and then the stock crashed. We were stopped out of out put spread at $50.65 almost immediately. There was no news.
The long put is almost in the money so there may be some hope for recovery here if BOBE continues to decline.
Closed Aug $50 Short Put, entry .77, exit 1.12, -.35 loss.
Retain Aug $45 Long Put, entry .11, currently .10
SPLK - Splunk (Stopped/CLOSE)
We were stopped out of the SPLK short put today for a minor gain. The long put still has significant premium but is well out of the money. I am recommending we close the long put at the open on Tuesday.
In retrospect I had the stop loss too tight since it was a $65 put but I was trying to avoid a big move, like we had today, that put us deep into negative territory. I am perfectly happy to exit with only a 3 cent loss.
Closed Aug $65 Short Put, entry $1.20, exit $1.15, +0.05 gain.
CLOSE Aug $60 Long Put, entry .48, currently .40, -.08 loss
Net loss 3 cents.
GLNG - Golar LNG (Stopped)
Golar spiked +$2.50 at the open on Wednesday on no news. Our stop loss was $44.45. Any time a stock gaps open $2.50 the premiums rocket higher. We were positively killed on this position with the $1.00 call spiking to $2.65. I looked at reopening the position but the volatility in Golar over the last week convinced me to take the loss and move on.
Closed Aug $45 short call, entry $1.00, exit $2.65, -1.65 loss.
Retain Aug $50 long call, entry .39, currently .25, -.14 loss
UCO - Proshares Ultra Crude 2x ETF
The ultra ETFs are for day traders trying to scalp a few cents off the move in the underlying. The UCO has underperformed for a long time and recently did a 1:5 reverse split on May 19th to avoid becoming a penny stock. Even in a rising crude market the ETFs rarely perform as advertised. With crude prices expected to decline for the rest of the summer I am recommending a call spread.
Sell short August $31 call, currently $1.00, stop loss $29.55
Buy long August $35 call, currently .45, no stop.
Net credit 55 cents.
New Covered Call Recommendations
New Aggressive Recommendations
New Long Term Recommendations
Existing Play Recommendations
Links to original play recommendation
BHI - Baker Hughes (Covered Call)
XOP - Oil Exploration ETF (Bear call Spread)
JOY - Joy Global (Bear call Spread)
LULU - LuluLemon (Bear call Spread)
BOBE - Bob Evans Farms (Put Spread)
SPLK - Splunk (Put Spread)
ZOES - Zoes Kitchen (Covered Call)
GLNG - Golar LNG (Bear call Spread)
SLB - Schlumberger (Bear call 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.