The second week of December turned out to be miserable for option sellers unless you were short calls.
I did not add any new plays last week because the market was so volatile. I said I would reconsider and send out another newsletter if the market improved. Unfortunately, it did not improve and only got worse. The Dow lost nearly 600 points and the Nasdaq -111.
Last week I recommended closing some of the profitable plays with little left to gain by keeping them open and raised the stops on everything else. When the market collapsed we were stopped out of everything and the biggest loss for the week was 35 cents. Given the market conditions I would call that a success.
I wish I could give you another five stocks today that would perform as well but we still do not know where the market is going. The sharp drop at the open on Monday was followed by a rebound but that rebound was also sold. It was only at the close that the market found some traction and edged higher.
However, while the Dow closed up +103, Nasdaq +19 and S&P +10, the Russell 2000 lost -8 points and closed near the low for the day. Since the Russell is typically the strongest index over the next two weeks this is disturbing. This is typically the strongest two weeks of the year for the Russell. If the small caps are going to continue their decline the broader markets could be restrained or even follow them lower.
The Fed meets this week and will announce their rate decision on Wednesday afternoon. Historically the market rises on the Tuesday before a Fed announcement and the futures are up slightly tonight. So far December has been tough for investors and the one day gain on Monday does not make a trend.
We still do not know what impact the closure of three high yield funds is going to have on the equity markets.
I recommend we continue to be cautious in our volume of positions until we see what the market gives us. If a late December rally suddenly appears, I will send out some more plays.
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
LRCX - Lam Research (Closed)
I recommended we close LRCX at the open last Tuesday to avoid any market downdraft. The option had evaporated to only a nickel and there was no reason to leave it open. In retrospect LRCX held up better than the majority of stocks last week.
Closed Dec $70 short put, entry $1.15, exit .05, +1.10 gain
FIT - FitBit (Closed)
I recommended we close FitBit at the open on Tuesday because the option had deflated. That was the right decision. The stock declined all week to lose -$6 at the lows today.
Closed Dec $25 put, entry .95, exit .13, +.82 gain.
ELLI - Ellie Mae (Stopped)
ELLI broke support on Friday and crashed from $64 to a low of $58 today. We were stopped out at $62.45. This was related to the closing of three high-yield funds on Fri/Mon.
Closed Dec $55 put, entry 1.35, exit .65, +.70 gain
MNK - Mallinckrodt (Stopped)
We were stopped on Tuesday at $69.85 on the short put. I had raised the stop because the put had declined in value and MNK was struggling at the $75 level. The $5 drop on Tuesday knocked us out by 8 cents but the decline continued all week. MNK appears to have found some support at $68 but we cannot reenter the position because the spreads have widened significantly.
Closed Jan $55 put, entry $1.85, exit $1.00, +.85 gain.
WTW - Weight Watchers (Stopped)
WTW broke support at $25 on Tuesday and declined to stop us out at $24.75. Shares continued lower all week. The premium was not deflating so it was a good thing we exited.
Closed Jan $21 put, entry $1.20, exit $1.21, -.01 loss.
RTRX - Retrophin (Stopped)
Retrophin began declining on the 3rd along with the biotech sector and it is still declining. We were stopped on the 8th at $20.85.
Closed Dec $17.50 put, entry .68, exit .90, -.22 loss
Expiring Dec $12.50 long put, entry .13, expiring, -.13 loss
Net loss 35 cents.
CEMP - Cempra (Stopped)
Cempra rolled over with the biotech sector and gapped down on the 8th to $28.28 and then continued to slide to stop us out of the covered call at $27.85.
Closed CEMP shares, entry $28.72, exit $27.85, -.87 loss.
Closed Dec $30 call, entry $2.60, exit .80, +1.40 gain
Net gain 53 cents.
LRCX - Lam Research
Lam has been one of the most stable stocks in the market for the last two months. The company is paying out a 30 cent dividend and Dec 9th was the ex dividend date so the post dividend depression has passed us. Shares declined on Fri/Mon for no reason and I suspect it was related to tax loss selling. Somebody had to sell their winners to offset their losers.
Lam is buying KLAC for $10 billion and analysts love the combination. Earnings are January 27th and we have time for one more short put on this stable stock. I hope I did not jinx it by calling it stable.
Sell short Jan $72.50 put, currently $1.05, stop loss $75.75
CLB - Core Labs (Short Put)
Core Labs took off like a rocket in the middle of the day to gain nearly $4 on no news. With all the major analysts recommending energy for 2016 this may have been fund managers getting a head start OR there is something going on that we do not know about like a pending acquisition announcement. There was another big gain on the 9th on no news.
I am recommending the $105 put and that would be under the December low.
Sell short Jan $105 put, currently $1.90, stop loss $110.50
New Covered Call Recommendations
Original Play Recommendations (Alpha by Symbol)
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.
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.
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
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.