November and December are the best two months of the year according to market statisticians. Let's hope this is the year that conforms to the seasonal norms.
The prior week was the worst week of 2015 for the markets. Last week was the best week of the year. It was only fitting that the markets were weak on Monday. Actually, the Monday following option expiration in November is normally weak. The next two days are typically bullish so let's get this party started.
Unfortunately, we can never depend on seasonal trends. Those trends are developed over long periods of time spanning several decades with both positive and negative markets. The seasonal trends simply mean that the markets were up more than they were down. It does not mean they were always up.
I am actually hopeful that this year will follow the trend at least over the next three weeks. Once we get close to the Fed meeting in December 15th all bets are off. I know the market rallied after the last FOMC minutes appeared to suggest there will be a hike in December. We may actually rally after a hike is announced but there is a difference between suggesting one and actually getting one. That is why I think the market will be volatile for several days ahead of the event.
The volume for the rest of the week will be very low and volatility could be either dormant or extreme depending on the headlines. There could be some concerns about a potential terror attack in the U.S. on or around Thanksgiving and that could weigh on the markets.
For instance, 3 million people will line the streets in New York for the Macy's parade. If there was ever an inviting target that has got to be it. Since this has been mentioned on multiple news shows we could see weakness ahead of Thursday. If nothing occurs, I would expect the market to celebrate the following week as people enter new positions.
We had a good month in the November cycle and I am looking forward to a good December cycle as long as the market cooperates.
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
Positions in the portfolio graphic that are shaded in pink expired on Friday. All were profitable. That includes DRI and both positions in QIHU.
ABMD - Abiomed (Closed)
Last week I recommended we close the short put on AMBD. That was done at the open on Tuesday.
Closed Nov $70 short put, entry $2.00, exit .05, +1.95 gain.
QUNR - Qunar (Stopped)
The covered call on QUNR was stopped on Thursday when shares plunged to $34.65 intraday. We had been in the money on the call for almost the entire time the position was open but were stopped out one day before expiration. We still exited with a nice gain.
Closed QUNR shares, entry $35.98, exit $35.75, -.23 loss
Closed Nov $35 call, entry $3.30, exit $1.10, +2.20 gain
Net gain $1.97.
UA - Under Armour (Not entered)
Under Armour gapped down nearly $6 last Tuesday and that gap voided the entry. The standard rule is to not enter a position on a gap open. The option premiums are skewed and headlines may have altered the basis for the play.
ELLI - Ellie Mae Inc (Short Put)
Ellie Mae is a software provider for the mortgage servicing industry. In October they reported earnings of 45 cents compared to estimates for 35 cents. Revenue of $68.9 million beat estimates for $62 million. The company guided higher for the full year to a range of $1.43-$1.45 and analysts were only expecting $1.36. Shares spiked to nearly $79 on the news. Post earnings depression arrived and shares sank to $60 on profit taking after being up more than 100% for the year.
Their main product is called Encompass and users increased +30% to 135,000 while the software as a service version saw users rise +47% to 116,000. The average revenue per users rose +24% to $520. There is nothing wrong with this company and it has a bright future with strong guidance.
The $60 level is decent support and it appears to be holding. Shares have risen for the last week. I am recommending we sell the December $55 put at $1.10 but aggressive traders may want to sell the $60 put for $2.30.
Sell short Dec $55 put, currently $1.10, stop loss $59.45, a 7 month low.
BLUE - Bluebird Bio (Short Put)
Bluebird is in the business of solving blood diseases. A new drug called BB305 in the testing stages cures a rare disease called beta-thalassemia in the majority of patients. Prior to this drug these patients had to receive routine blood transfusions, which are not only expensive but dangerous.
At the ASH conference in early November they released results that showed most patients were successful but three patients had a doubly rare form of the same disease and the drug did not work for them. The stock crashed even though these patients with the extremely rare form of this disease are a very minor subset of the patient population. The vast majority of people with this disease will benefit significantly from the treatment. The FDA has labeled it a "breakthrough therapy." It also has an application in sickle cell disease.
Shares are recovering from the crash and should break over $85 in a decent market. I am recommending the December $65 puts that are $20 OTM.
Earnings are Feb 24th.
Sell short Dec $65 put, currently $1.55, stop loss $69.85
RTRX - Retrophin (Put Spread)
Retrophin is another biotech stock seeking to develop drugs to fight rare diseases. Last Monday the company received orphan drug designation for Sparsentan, a drug to treat focal segmental glomerulosclerosis.
Previously the FDA had also approved that designation. Being designated an orphan drug carried regulatory and financial incentives to continue developing the therapy. When the drugs come to market they typically carry a high price tag.
Retrophin has been basing at $18 for the last two months and has begun to move higher over the last week. The put spread I am recommending is the 17.50/12.50 for 50 cents. The 17.50 level is the recent support.
Earnings are Feb 2nd.
Sell short Dec $17.50 put, currently .75, stop loss $18.65
Buy long Dec $12.50 put, currently .25, no stop
net credit 50 cents.
New Covered Call Recommendations
Existing Play Recommendations
Links to original play recommendation
BHI - Baker Hughes (Covered Call)
DRI - Darden Restaurants (Bear call Spread)
QUNR - Qunar Cayman (Covered Call)
QIHU - Qihoo Technology (Short Put)
QIHU - Qihoo Technologies (Covered Call)
ABMD - Abiomed (Short Put)
LRCX - Lam Research (Short Put)
CEMP - Cempra (Covered Call)
FIT - FitBit (Short Put)
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.