Seriously oversold conditions were reversed on Monday with a decent short squeeze that lifted markets back to their recent resistance levels.
After seven days of consecutive losses on the Dow it was time for a short squeeze. The rebound brought the Dow back to 17,600, S&P 2,100 and Nasdaq 5,100. Those have been critical levels in the past. If we were to move higher there are even stronger resistance points at 17,775 on the Dow and 2,110 on the S&P.
The only position to get stopped out was the XOP when energy shares were squeezed but we were already so far out of the money it did not impact our gains.
The recent volatility from this range bound market is giving me nightmares. We have been stopped out of many positions over the last three months where it was a one-day move and then the original trend returned.
In an effort to reduce the unplanned exits I am going back to some longer term short puts and more covered calls. I originally moved to more of the spreads several months ago to avoid the big volatility moves we were seeing in Nov-Jan. The idea was to reduce the number of big losses but instead we are suffering from a hundred paper cuts.
I am going to try and focus on stocks that have recently reported positive earnings and have a decent trend and try to sell a put two months out that expires before their next earnings date.
There is no guaranteed way to avoid being stopped out in the options market unless you sell an option $20-$30 OTM for 20 cents or less. While that is a fairly safe process the return on investment is minimal. Even then it would only take one news related spike/decline to wipe out your profits for several months of trading.
With August and September typically weak months in the market we do not want to load up on short options. The worry over a September rate hike will also weigh on investors. We need to pick our positions carefully and bide our time until after the Fed meeting.
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
XOP - Exploration ETF (Stopped)
The short squeeze in the energy sector today spiked the XOP +$2.56 and stopped us out of the short call position. We were well out of the money and the spike did not have any impact on the premium.
Closed Aug $46 Short Call, entry .93, exit .04, +.89 gain.
Retain Aug $50 Long Call, entry .20, currently zero, -.20 loss
Net gain .69 cents.
CBI - Chicago Bridge & Iron (Short Put)
CB&I has been relatively immune to the short term volatility in the market over the last couple of weeks. They quietly reported earnings of $1.55 that beat estimates for $1.44. Revenue was light at $3.21 billion and below estimates for $3.58 billion. However, revenue is always a moving target with CBI because they receive progress payments as portions of construction jobs are completed and there are always delays of some sort. Analysts do not really penalize them for revenue misses. They also lost $240 million in revenue because of currency issues with the strong dollar. Their contract backlog of $29.4 billion remains strong despite a $270 million impact from the dollar. That impact fluctuates with the dollar since some of these contracts are years out into the future.
Shares are about to break over the post earnings resistance at $53.50, which is also the resistance from the 300-day average. A breakout should target $60.
Earnings are Oct 29th.
Sell short October $45 put, currently $1.65, stop loss $49.85
GPRO - GoPro (Short Put)
GoPro rallied after earnings and has been glued to the $62-$64 range for three weeks. Today was the high close for that period. A breakout over $65 should trigger short covering and another spurt higher.
Earnings are Oct 29th.
I am recommending this position only with a GPRO trade at $65.85. I want to see that breakout before we sell this put.
With GPRO trade at $65.85:
Sell short Sept $57.50 put, currently $1.33, stop loss $61.25
MNST - Monster Beverage (Bear Call spread)
Monster reported earnings that missed on both top and bottom. Earnings of 79 cents missed estimates for 90 cents. Revenue of $693.7 million missed estimates for $752.9 million. Operating expenses rose to $166.1 million despite the lower revenue and earnings. If it were not for the $2.1 billion Monster received from Coke for a 16.7% stake and the joint marketing arrangement the earnings and outlook would have been a lot worse. The energy drink craze seems to be fading and with it Monster earnings.
Earnings Nov 5th.
Do not enter this position unless MNST shares trade at $143.85.
Sell short Sept $155 call, currently $1.45, stop loss $147.85
Buy long Sept $165 call, currently .50, no stop.
Net credit 95 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)
ZOES - Zoes Kitchen (Covered Call)
GLNG - Golar LNG (Bear call Spread)
UCO - Ultra Crude ETF (Bear call Spread)
SWKS - Skyworks Solutions (Bear call Spread)
URI - United Rentals (Bear call Spread)
NSC - Norfolk Southern (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.