The market swings have been unbelievable and they are not over yet. The 1,089 intraday decline on the Dow is going to be followed by a triple digit short squeeze.
The market correction may have ended in spectacular fashion on Monday with all the major indexes closing in correction territory. The intraday drop on the Dow came on unbelievable volume of 14 billion shares with 13 billion in declining volume. New lows were 30:1 over new highs and decliners were 10:1 over advancers. This was a classic capitulation day where everyone flushes their portfolio and then watches in horror as the indexes rebound.
The S&P futures are up nearly +50 on Monday night with the Dow futures up nearly +400. If this holds overnight, there will be a monster short squeeze on Tuesday. It is conceivable that the Dow could erase today's -588 closing drop with a rebound of equal proportions.
Unfortunately that puts us in an untenable position. There is almost nothing we can buy or sell at the open tomorrow that makes sense. With the S&P futures at +47 everything is going to gap open and option premiums will be sky high. Unfortunately the volatility will still be with us. Just because the markets are poised to have a good day does not mean that good luck will last more than a day or two.
After the flash crash in May 2010 the market rallied for three days then rolled over to make several new lows. Jumping into this malestrom with a bunch of plays that could gap up $3-$4 at the open just does not make sense. We are better off to watch and wait and see what direction the market chooses.
I did recommend a VIX call spread with the VIX at 6-year highs. The opening bounce is going to knock the VIX back to reality very quickly but maybe we can slip in a quick play before everything deflates.
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
JOY - Joy Global (Expired)
Joy declined $10 from where we entered the play and both options expired worthless.
Expired Aug $35 short call, entry .50, expired, +.50 gain
Expired Aug $40 long call, entry .11, expired, -.11 loss
Net gain 30 cents.
NFLX - Netflix (Stopped)
The market meltdown knocked us out of the short put on NFLX. Nothing changed with the stock. It was just a market crash. Unfortunately, it came on a series of gap down opens so the option premiums spiked significantly. You cannot fight multi dollar gap opens. It is a loser every time.
Closed Sept $115 Short put, entry $2.05, exit $3.89, -1.84 loss
UA - Under Armour (Stopped)
Same story as Netflix. The market meltdown crashed the sector with huge gap down declines.
Stopped Oct $95 short put, entry $2.31, exit $2.80, -.49 loss
SWKS - Skyworks (Unopened)
Skyworks never traded up to $93.25 to trigger the put spread. The recommendation from last week is cancelled.
ZOES - Zoes Kitchen (Stopped)
Zoes collapsed with the market and stopped us out of the covered call on the 18th.
Closed ZOES shares, entry $41.65, exit $38.85, -2.80 loss
Closed Aug $40 short call, entry $3.80, exit .55, +3.25 gain
Net gain 45 cents.
$VIX - Volatility Index (Call Spread)
The VIX hit levels not seen since the financial crisis in 2008. The high today was 53.29. There is no way in the current environment that the VIX will remain this high. Typically periods of volatility last for a week or two with it being very rate for volatility to remain high for multiple weeks.
I am recommending an in the money (tonight) bear call spread. With the futures at +45 tonight these strikes should be out of the money at the open.
Sell short Sept $30 call, currently $3.60, no stop.
Buy long Sept $40 call, currently $2.10, no stop.
Net credit $1.50 but that will change at the open.
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)
MNST - Monster Beverage (Bear call Spread)
NFLX - Netflix (Short Put)
SWKS - Skyworks (Put Spread)
UA - Under Armour (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.