Last week I mentioned that there were only 4 more days until 2016 and the potential for a better market. Oops!
I also said, "There is also a seasonal bout of volatility in the first week of January. We either shoot up big or fall off a cliff. It is a coin flip for direction. Because of the impending volatility, I am trying to be very cautious in adding new plays. There is no valid reason to add a bunch of plays when we know the market is going to blast off in an unknown direction in just four days. We need to wait and see what January brings before we add some more risk."
Wednesday and Thursday saw a negative market, which was actually a seasonal trend. However, the last hour on Thursday saw a sharp decline in the indexes as traders shorted everything in sight in anticipation of January tax selling. Little did they know they would be rewarded handsomely thanks to China, Iran and Saudi Arabia and some really bad economics in the USA.
Hopefully the larger than expected bout of volatility cleared out everyone that held their gains until January in order to put off taxes for another year. The -467 point drop in the Dow intraday was pretty ugly and I can't imagine anyone holding those stocks they planned to sell anyway.
Tax selling was clearly evident with winners from last year down the most and those stocks that had been sold late in 2015 were the big winners today.
I looked at adding a VIX call spread tonight but the late day rebound knocked a lot off the VIX and deflated the calls to the point where they are not worth the risk. With the Chinese indexes mixed at the flat line in early trading, and we still do not know which way they are going. S&P futures are slightly positive at +3 as I type this. After a -400 point day, they should be up big or down big and definitely not flat.
I did not add any new plays today. I recommend we remain cautious until a trend develops in either direction.
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
AMBA - Ambarella (Stopped)
It is no surprise that we were stopped out of the short side on Ambarella. It would have been a surprise if we had not been stopped out on the big gap down open.
Closed Jan $52.50 short put, entry $1.25, exit $2.15, -.90 loss
Retain Jan $45 long put, entry .30.
IWM - Russell 2000 ETF (Stopped)
S&P futures were down -40 just before the open on the China news. The IWM gapped down -3.60 at the open to knock us out of the short position. The Russell fell -27 points or -2.4%. The normal small cap bullish bias for January has yet to appear.
Closed Jan $108 short put, entry .34, exit $1.01, -.67 loss
Retain Jan $103 long put, entry .08.
New Covered Call Recommendations
Original Play Recommendations (Alpha by Symbol)
AMBA - Ambarella Inc (Put Spread)
Ambarella reported earnings on Dec 4th and lowered guidance as a result of lower than expected demand from GoPro. Shares dropped sharply and then recovered after a week of volatility. They are moving slowly higher as the company discusses deals with other vendors and proves it is not reliant on GoPro. Shares have resistance at $60 and they touched that on Monday. I am recommending a put spread well under the December low.
Earnings March 3rd.
Sell short Jan $52.50 put, currently $1.55, stop loss $54.85
Buy long Jan $45 put, currently .40, no stop loss
Net credit $1.15
FIT - FitBit
FitBit was the holiday winner. Multiple reports from tracking companies said the counters with the most shoppers in the last two weeks before Christmas were the FitBit counters. The FitBit app was the number one downloaded app in the Apple App Store for three days starting on Christmas Day. It has been in the top ten in the Google Play store for Android devices since Christmas. Best Buy reported sales had exploded and they were having trouble keeping the shelves stocked. In my family of six people, three got FitBits either for themselves or for others.
This sales news should carry forward until their earnings on January 28th. The real risk is the market volatility around the first of the year.
FitBit shares declined with the market the prior week and made a higher low at $27 after the $26.50 low in November. Shares were up +3% today to $30. I believe they will continue to rise at least slightly, market permitting.
Buy-write FIT Jan $31 call, currently $29.82-$1.20, stop loss $27.85
Net gain if called $2.38
IWM - Russell 2000 ETF (Put Spread)
This is a low dollar spread with the IWM at $114. Typically the Russell is the strongest index for the next three weeks. Unfortunately, seasonal trends have not worked out well this year. However, the Russell is trying to put in a higher low and the ETF was down only fractionally today. I tried to get as far out of the money as possible because there is always some volatility around the first of the year.
IWM 108/103 37/12 cents
Sell short Jan $108 put, currently 37 cents, stop loss $110.85
Buy long Jan $103 put, currently 12 cents, no stop.
Net credit 25 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
SRPT - Sarepta Therapeutics (Covered Call)
Sarapeta announced that the FDA will review their muscular dystrophy drug on January 22nd. That is 7 days after the January options expire. That created an event horizon that increased the value of the options but will not occur until after expiration. That should keep the stock inflated as well. SRPT shares have failed to decline materially over the last several weeks in a bad market. They are holding steady at $38. I am recommending the $40 calls because the $38 calls do not have a lot of volume and the bid/ask spread is wide.
Earnings Feb 4th.
Buy write SRPT Jan $40 Call, currently $37.85-$2.30, stop loss $33.85
Gain if called $4.45
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.