Sometimes you are just standing in the wrong place at the wrong time and bolt of lightning suddenly appears to knock you on your rear end.

That happened to us today. We had a short put position on Bluebird Bio and the stock gapped down $30 at the open on less than exciting clinical trials of a new drug. They announced the news at 12:47 AM and the stock crashed at the open. Fortunately our put was $25 out of the money so the instant drop, though painful, was a lot less painful than it could have been. Instead of a $30 loss, we only lost $6.

Can it happen twice in the same day? Absolutely. United Rentals dropped -5% at the open on no news. That only resulted in the loss of $1 but it was also painful.

We had a really good month in progress with strong gains in the portfolio. Those two losses put us back into a deficit position.

Because of the recent market volatility, I am recommending we close two positions and I raised the stop losses on all the remaining positions. The S&P futures are down -11 as I write this so I will not be adding new plays today. We need to see where the market is going before we try to follow it.

If the market recovers from this overnight plunge I will send out an update on Wednesday night with new positions. There is no reason to jump in front of a speeding freight train to pick up a few nickels.

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


URI - United Rentals

Shares dropped -5% today on no news. With the Dow down -200 at the open there were a lot of stocks that declined without any material news. This is the period in December where investors sell both winners and losers to manage their tax bill.

Closed Jan $70 short put, entry $1.10, exit $2.36, -1.26 loss.



BLUE - Bluebird Bio

At 12:47 am Bluebird released data from clinical trials on their blood drug for Sickle Cell disease and similar problems. The data was not as positive as analysts had expected and shares collapsed -37% to $52. The stock opened at $60 and we had a Dec $65 put. The put opened at $8.40 and traded as low as $6.27 before rising sharply higher to close at $13.10. We were stopped out at the open with our stop at $69.85.

These things happen and we cannot control them. They happen to everyone. For instance Keurig (Green Mountain Coffee) GMCR spiked 75% at the open with a $40 pop when they announced they were being taken private in an LBO. Numerous hedge funds were caught in the disaster because there was a large short interest on the failure of the Kold carbonated beverage dispenser to excite investors. Shares were in plunge mode until the announcement.

Closed Dec $65 short put, entry $1.65, exit $8.40, -6.75 loss



New Recommendations


None


New Covered Call Recommendations


None


Original Play Recommendations (Alpha by Symbol)


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.

Earnings 2/11.

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


CEMP - Cempra (Covered Call)

Cempra is nearing completion of a new drug application for solithromycin, which treats the most common form of bacterial pneumonia. That is the number 1 cause of death from an infection in young and old patients. This drug would be a new treatment for antibiotic resistant forms of pneumonia. After the company presented on the drug at the CHEST conference in late October the chart has gone vertical.

Earnings Feb 24th

Buy write Dec $30 call, currently $28.90-$2.45, stop loss $25.25
Gain if called $3.55


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.

Earnings 2/11.

Sell short Dec $55 put, currently $1.10, stop loss $59.45, a 7 month low.


FIT - Fitbit (Short Put)

Fitbit was crushed last week in a market related dive and they announced a 21 million share secondary at $29. Originally it was to be 7 million company shares and 14 million shareholder shares. That was downsized over the weekend to 3 million company shares and the same 14 million shareholder shares. The stock rallied on Monday after Suntrust reiterated a buy rating and said the decline was overdone. The analyst said Fitbit was suffering from the weak pricing on the Square IPO, the drop in GoPro, the weak retail sales numbers and the weak market rather than a company specific headline. If they are successfully selling 17 million shares at $29 the stock should not decline to $25.

The company reported earnings on Nov 3rd of 24 cents that more than doubled the 10 cents expected. Revenue of $409.3 million also beat estimates for $360 million. They also guided higher for the current quarter and above analyst estimates on both earnings and revenue.

Earnings Jan 28th.

Sell short Dec $25 put, currently $1.10, stop loss $26.45 which would be a new low.


LRCX - Lam Research (Short Put)

Lam announced in late October it was acquiring KLA-Tencor (KLAC) and analysts went wild. The stock shot up to $74 and never looked back. This is supposedly a deal made in heaven if you believe all the positive press.

Earnings Jan 27th.

Sell short Dec $70 put, currently $1.15, stop loss $73.75


MNK - Mallinckrodt (Short Put)

MNK was knocked for a $25 loss in early November when short seller Citron Research shifted its focus from Valeant (VRX) to MNK. The drop was short lived after MNK fired back at Citron and quickly took itself out of play as a new biotech disaster. The company develops and markets both branded and generic pharmaceuticals.

MNK reported earnings on the 23rd of $1.84 compared to estimates for $1.74. Revenue of $882.4 million also beat estimates. Over the last four quarters, the company has beaten on earnings by an average of 17.5%. Shares rallied sharply on the news and the stock has recovered almost all the losses from the Citron attack.

Earnings are Feb 3rd.

Sell short Jan $55 put, currently $1.90, stop loss $63.25


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.


URI - United Rentals (Short Put)

United offers 3,300 classes of equipment for rental to construction firms, oil exploration companies, state and local governments. The shares took a hit in July when the company posted earnings that missed estimates because of a sharper than expected decline in oil field rentals. Since then the company has had positive things to say about the business and shares are approaching resistance at $80 and a four-month high.

Earnings are Jan 20th.

Sell short Jan $70 put, currently $1.10, stop loss $72.65


WTW - Weight Watchers (Short Put)

WTW soared a couple weeks ago when the company announced Oprah Winfrey had taken a 10% stake in the company and would put her weight behind the product. Everyone knows the Oprah effect is legendary. Whatever she backs always explodes as millions of fans follow her lead. Shares are not showing any post headline decline and it appears the rally may stick.

Earnings Feb 25th.

I am recommending the January put but the December $23 put is 95 cents with 18 days remaining. I thought the risk was lower with the January $21 strike.

Sell short Jan $21 put, currently $1.20, stop loss $22.85


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.