The market is setting up for a rebound on Friday after the Shanghai Composite gained +3% intraday.
You knew there was a short squeeze in our near future. We cannot decline that far, that fast without a monster squeeze when sentiment reverses.
The Dow is down more than 1,100 points since the 17,603 close on Dec 30th. It is not surprising that we were stopped out on almost everything over the last week. These market events happen and we have to take the pain and move on to the next monthly cycle.
I looked at the VIX options every day this week but they never made sense. The higher out of the money call strikes were too expensive because of the velocity of the decline. There will probably be a trade at the open tomorrow but you will have to pick your own strikes. The prices currently listed are the ones at Thursday's close after a -392 point Dow drop. Dow futures are up +153 tonight so I am not seeing a complete retracement of Thursday's drop. While it is possible it is not probable.
However, with the Employment Report in the morning it could be giving traders a cause to pause rather than jump on the China news.
I am recommending we close the AMBA and IWM long puts before the premiums evaporate with only a week left until expiration.
If we can close Friday with a decent gain maybe we will see some calm return to the markets next week.
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 (Close long)
Ambarella fell -9% on Thursday to close at $50. After the bell chip makers Cirrus Logic (CRUS) and Qorvo (QRVO) both warned on slowing sales. This may give Ambarella a little more of a push on Friday but should the market rebound I am sure there will be short covering. I am recommending we close the long put.
Close Jan $45 long put, entry .30, currently .55, +.25 gain
IWM - Russell 2000 ETF (Close Long Put)
The IWM collapsed to $105.50 intraday with the Russell 2000 down -30 points. In theory the Russell has no support until 1,050 and that equates to the $105 level on the IWM. Apparently the ETF got ahead of the actual index. We are due for a short squeeze in the IWM/RUT.
Close Jan $103 long put, entry .08, currently .90, +.82 gain.
LRCX - Lam Research (Stopped)
I was telling somebody on Tuesday that LRCX was the indestructible stock as it continued to rise despite the weak market. That bullet proof shield evaporated over the last four days with the stock crashing on Wednesday and continued today. Shares are down nearly $10 in five days. We were stopped on the big plunge at $75.75.
stopped Jan $72.50 short put, entry .65, exit .80, -.15 loss.
FIT - FitBit (Stopped)
Fitbit declined -18% on Tuesday despite announcing a new fitness watch. The problem was the other competitors that announced products on the same day. UnderArmour announced multiple wearable products including a fitness tracker that included pressure sensors and GPS in your shoes. Fossil said they were going to release more than 100 new wearable products in 2016. The field is suddenly getting a lot more crowded. We were stopped on the Wednesday plunge.
Closed FIT shares, entry $30.50, exit $27.85, -2.65 loss
Closed Jan $31 short call, entry $1.45, exit .70, +.75 gain
Net loss $1.90.
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.