Wednesday was another day of extreme volatility with the Dow down -198 at the open only to rebound to +220 just before the close.

Volatility is good for inflating prices but it emphasizes the indecision in the market. When the Dow can trade in a 420 point range we are only a few hours away from that 420 points being all in the same direction. Two weeks ago after several days of 200+ point moves the Dow dropped -550 on January 20th.

If the Dow is capable of moving in a 420 point range on Wednesday it is also capable of moving that many points in one direction. Fortunately, the S&P futures are up +13 as I write this so there is a good chance we are going to move higher on Thursday. If we could string a few of these gains together rather than alternating with losses we would have a heck of a rally.

The economics, worries from Asia and Europe and of course oil prices are all weighing on the markets. On the oil front Russia has agreed to meet with six OPEC nations to discuss oil production. That was good for an 8% spike in oil prices on Wednesday. Unfortunately, Saudi Arabia was not one of those nations and without Saudi Arabia, there will be no agreement.

Eventually this will dawn on the press and they will quit repeating the Russian comments. They are just trying to inflate oil prices with their headline spam. Once that happens and oil prices retreat the market will follow them lower.

On the outside chance that an actual meeting does occur and anything is agreed to beside the lunch menu, the price of oil could rocket higher. The market will follow initially but eventually will realize that higher oil prices are bad for the global economy and the cycle will fall apart.

We cannot worry every day about the direction of oil prices. It would drive you crazy. We should just focus on our positions and try to keep our positions small until the market picks a real direction. One-day moves are nice but they are not a trend.

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.

Lines in blue were previously closed.

Current positions

Monthly Cash Machine


Current Position Changes


PVH - PVH Corp (Close)

PVH rebounded to trigger the second attempt at shorting the Feb $75 call but continued immediatel yhigher to stop us out for another small loss. Fortunately, the stock continued higher and the long $80 call is now worth $1.95. On Tuesday the company raised guidance and announced a deal through its Tommy Hilfiger Licensing company with G-III Apparel Group for its women's wear collections that could provide a billion-dollar opportunity to expand its brand. Under the agreement G-III Apparel Group would design, produce and distribute Tommy Hilfiger's women's sportawear, suit separates, performance and denim apparel in the U.S. and Canada.

I considered closing the long call but the S&P futures are up +10 tonight and we could see another move higher on Thursday. I added a stop loss on the long call at $76.85.

Previously closed Feb $75 short call, entry $1.29, exit .86, +.43 gain.
Closed short Feb $75 call, entry .70, exit .95, -.25 loss.

Retain Feb $80 long call, entry .45, currently $1.95.



EOG - EOG Resources (cancel)

I tried to reload a new $72 call on EOG but it failed to decline to our entry point. Cancel the recommendation.

Since I do not expect this rebound in oil to last I am recommending we close the long call.

Cancel: short Feb $72 call with an EOG trade at $64.25

Close: Feb $75 long call, entry .23, currently .74.



XOP - Exploration ETF (Cancel)

I tried to reload a new $29 call on XOP but if failed in today's volatility. The XOP plunged to $25.48 at the open to trigger the short then rallied to $27.55 at the close to stop us out by 10 cents. The XOP rallied +8% from its lows on the extreme volatility in crude prices.

Closed short Feb $29 call, entry 28 cents, exit .67, -.39 loss

Retain Feb $31 long call, entry .10, currently .31. No stop.



DIA - Dow ETF (Close)

The short put on the DIA ETF has declined from 82 cents to 6 cents. In this period of heightened index volatility I am recommending we close the short put. The Dow is moving more than 200 points a day in opposite directions. If it suddenly went directional our put could inflate very quickly.

Close Feb $145 short put, entry .82, currently .06, +.76 gain.
Retain Feb $135 long put, entry .28, currently .01.



VRX - Valeant Pharma (Stopped)

The Valeant CEO provided a boost to the stock the prior week by saying he was returning to the company after a medical leave for severe pneumonia. I recommended a short put on the stock on Wednesday. The very next day a hedge fund with a long position said they had contacted Valeant to find out when Pearson was coming back and the company would not give a date. In other words, I am coming back someday. Please quit selling my stock. The lack of any details on a date caused the stock to drop $8.50 on Thursday to stop us out on the same day we entered the position. It was not a good day.

Closed Feb $80 Put, entry 2.00, exit $3.85, -1.85 loss.



New Recommendations


BABA - Alibaba (Call Spread)

Alibaba reported better than expected earnings but the lowest increase in gross merchandise volume in three years. The economic slowdown in China is impacting their sales and the ever present worries over management and accounting issues are also a concern. Shares completed a death cross of the 50/200 day averages this week.

Sell short March $72.50 call, currently 72 cents, stop loss $69.45
Buy long March $80 call, currently 17 cents, no stop loss
Net credit 55 cents.



DAL - Delta Airlines (Call Spread)

Delta will continue to struggle with the rising number of Zika virus cases and will be forced to give refunds and/or cancellations. The governor of Florida declared a health emergency in four counties on Wednesday because of 9 new Zika cases. This is only going to get worse. Rising oil prices are also going to be a challenge if OPEC follows through on an actual meeting.

Earnings 4/13.

Sell short March $48 call, currently 65 cents. Stop loss $46.25
Buy long March $52.50 call, currently 14 cents, no stop loss
Net credit 51 cents.



Potential Additional Plays

These are not official recommendations but a good place to start if you want more plays.

Symbol - Type - Strikes - Net Credit

PVH - Put spread - 65/55 - 30 cents
XBI - Put spread - 40/35 - 50 cents
RCL - Call spread - 85/95 - 48 cents


New Covered Call Recommendations


None


Monthly Cash Machine Recommendations


DIA - Dow ETF (Put Spread)

I am replacing the expiring February put spread with a new march spread. This is so far OTM it will be very hard to be hit. I said hard, not impossible.

Sell short March $145 put, currently 72 cents. Stop loss $155.85
Buy long March $130 put, currently 20 cents, no stop loss.
Net credit 52 cents.



SPY - S&P SPDR ETF (Put Spread)

This is well OTM and would require a severe market meltdown to be hit. This would require a -300 point S&P decline to reach the short strike and we will be out well before that could happen.

Sell short March $162 put, currently 51 cents, stop loss 182.25
Buy long March $150 put, currently 21 cents, no stop loss
Net credit 30 cents.



Original Play Recommendations (Alpha by Symbol)


DAL - Delta Airlines (Call Spread)

Delta and the other airlines are suffering from the Zika virus. Because the virus is spreading like wildfire in South America and Latin America the airlines are being forced to give refunds and cancel flights for pregnant women and their traveling companions. The virus slows brain development in the fetus.

Delta is offering a change to an alternate destination, alternate travel dates or a refund. They are also exempt from fees to change future reservations and tickets.

This is causing a lot of trip cancellations. The airlines are just now digging out from the nearly 14,000 flight cancellations last weekend because of the snow storm in the Northeast.

Earnings April 13th.

Sell short Feb $48 call, currently 44 cents, stop loss $47.05
Buy long Feb $51 call, currently 11 cents, no stop.
Net credit 33 cents.


DIA - Dow SPDR ETF

The Dow closed at 16,000 on Friday or 159.66 on the DIA. The August flash crash low on the ETF was 150.57. We are severely oversold and the relief over the economics in China could cause a rally/short squeeze on Tuesday. The ETF closed right on support and now that option expiration is behind us we could be looking at some bargain hunting. The S&P futures are up +15 while I am typing this.

I am recommending the $145 put which corresponds to 14,500 on the Dow. That is another -1,500 points below where we closed on Friday and 550 points below the flash crash low in August.

Sell short Feb $145 put, currently $1.06, stop loss 153.85
Buy long Feb $135 put, currently .56, no stop loss.
Net credit 50 cents.


EOG - EOG Resources (Call spread)

EOG is one of the best shale producers in the country but they cannot compete with oil prices under $30. EOG and PXD are the top two companies in the space but oil prices should continue to fall to the $25 level in the days ahead. This will weigh on stocks in the sector. Every day there is an article about weakness in the sector with some analysts claiming as many as half could file bankruptcy. EOG is not in that category but they will continue to be dragged lower by the drop in oil prices.

Earnings Feb 25th

Sell short Feb $70 call, currently $1.12, stop loss $67.25
Buy long Feb $75 call, currently .50, no stop loss
Net credit 62 cents.


IWM - Russell 2000 ETF

The IWM dipped to $95 on the Wednesday crash last week. The decline today inflated premiums slightly and we can get a $90-$84 put spread for a 25 cent credit. The IWM closed at $99.68 today and a dip to 90 would equate to a drop on the Russell 2000 to 900 and it is currently 1,002. That would be another 10% decline. This makes our proposed spread relatively safe, if there is such a thing in this market.

Sell short IWM Feb $90 put, currently 36 cents, stop loss $94.25, under the Wednesday low.

Buy long Feb $84 put, currently 11 cents, no stop.

Net credit 25 cents.


LULU - Lululemon Athletica (Put Spread)

LULU did exactly the opposite of every other retailer last week. LULU raised earnings guidance for Q4 as a result of a very good holiday quarter. The company raised revenue guidance to a range of $690-$695 million, a 19% increase over Q4-2014 on a constant currency basis. They raised earnings guidance from 75-78 cents to 78-80 cents. The company said they had a very successful holiday season and sales exceeded their expectations.

Shares spiked to more than $60 on the announcement and faded back to $56 in the very weak market. The $53 level is decent support and has held for the last two weeks despite the market crash. With a positive market we should expect to see investors looking for a safe port to ride out any future volatility and a company that raised guidance is a good place to hide.

Earnings are March 24th.

Sell short Feb $50 put, currently .95, stop loss $52.45
Buy long Feb $45 put, currently .48, no stop loss.
Net credit 47 cents.


OIH - Market Vectors Oil Service ETF (Call Spread)

The OIH is supposed to replicate the Oil Service Index, which represents U.S. listed companies that are involved in oil services to the upstream oil sector, which includes drillers, producers, etc. The service sector is in real trouble. With the price of oil collapsing and companies taking rigs out of service at a record rate the demand for oil services is shrinking fast. Oil is not expected to firm until May although we could see some short term spikes from short covering or based on headlines.

Service companies that have work are being forced to discount their prices deeper every month in order to win contracts. Producers claim their new contracts are 25% to 40% below the rates they paid this time last year.

The XLE also offers an attractive spread using the 59.50/63.50 calls with a 29-cent net credit.

Sell short Feb $25 call, currently 39 cents, stop loss $24.25
Buy long Feb $29 call, currently 6 cents, no stop loss.
Net credit 33 cents.


PVH - PVH Corp (Call Spread)

PVH, a designer of branded shirts, ties and sportswear, posted disappointing earnings for the third consecutive quarter and then provided weak guidance for the full year. Zacks downgraded them to a "strong sell" and shares are in dive mode following the earnings. With other retailers also reporting weak results for December the outlook for PVH is not good.

Earnings Mar 23rd.

Sell short Feb $75 call, currently $1.25, stop loss $73.25
Buy long Feb $80 call, currently 55 cents, no stop loss
Net credit 70 cents.


VIX - Volatility Index (Call Spread)

Volatility spiked to 32 on the VIX today before falling back to close at $27.50 with the Dow still down -250 at the close. The massive imbalance in the internals with decliners 30:1 over advancers at the intraday lows, suggests we have seen a capitulation event. Volume was massive at 12.4 billion shares.

The rebound was clearly fueled by short covering but it may not be over. The futures are up +17 as I type this. The drop in the S&P to the October 2014 Ebola low at 1,820 was quickly bought and the rebound took it back to 1,860. That is a massive rebound and represents some decent buying in addition to the short squeeze.

The VIX closed at 27.50 and will probably open on Thursday at $25 or lower. I am recommending an ITM spread tonight because I expect it to be ATM at the open tomorrow. If the massive selling has finally run its course, even if there is some follow on bouts of weakness, then the VIX should decline quickly. The February strikes have 27 days until expiration.

I am not putting a stop loss on it since it is "volatile" which should be no surprise. It is a cash settled index but nobody ever exercises their calls until the last minute or they just sell them back into the market.

Sell short Feb $25 call, currently $3.00, no stop
Buy long Feb $35 call, currently $1.05, no stop loss
Net credit $1.95.


VRX - Valeant Pharma (Naked Put)

Valeant has seen some tough times lately after CEO Michael Pearson was hospitalized for severe pneumonia. It was so bad he had to appoint a three person executive office and a three person board to oversee them. The stock collapsed because investors immediately saw there was no succession plan. Pearson is very well liked by the dozens of hedge funds that own stock in the company. Pearson went on medical leave at the end of December and said this week he will be returning soon. The stock immediately began to rebound although the biotech sell off on Wednesday knocked $4 off the gains. I believe Pearson's return is the magic bullet for the shares.

Earnings Feb 22nd.

Sell short Feb $80 put, currently $1.62, stop loss $86.65.


VXX - Vix Futures ETF (Call Spread)

The VXX is the ETF for the Volatility Index ($VIX). You can buy options on both but the options on the VIX are more expensive and has fewer strikes. The VXX has only traded over 38 once since 2014 and it was for a single day. The huge market volatility over the last couple of weeks has only succeeded in lifting it to 26. I am recommending a credit spread using the February 38/45 calls. There will not be a stop loss on this position because any spike in volatility that succeeds in lifting the VXX that high is likely to be very brief.

When the VXX was first introduced, it was considerably higher than it is today. When accounting for splits to keep is listed, it has traded well over 1,000. The vehicle is flawed and like so many other futures ETFs it has slowly declined over the years as fewer investors trade it. The flaw is obvious when the extreme volatility over the last three weeks has been unable to power it much higher.

Sell short Feb $38 call, currently .82, no stop loss
Buy long Feb $45 call, currently .52, no stop loss
Net credit 30 cents.


XOP - Oil Exploration ETF

Crude oil closed at a 13 year low on Wednesday at $26.55. Much of the decline was due to the expiring February contract. Starting tomorrow the March futures contract becomes the front month contract. The march futures are trading at $28.66 tonight. This could cause the markets and energy stocks to rise at the open on Thursday as uninformed traders believe oil prices have risen.

The API inventory report after the bell tonight showed a gain of 4.6 million barrels of oil and a similar rise in gasoline. The EIA report due out at 10:30 tomorrow will be more accurate and is expected to show a big build in crude. This should damper any further rise in price.

Also, traders who successfully rode the February contract down to 13 year lows are sure to pile on to the March contract and try to duplicate their luck.

Oil prices should continue falling through March as inventories build. However, they are reaching levels where further declines are going to be hard fought. Regardless, U.S. producers are going to see their stocks continue lower because nobody can make any money under $30 and most are losing money under $50.

I am recommending a February call spread on the exploration ETF to capitalize on the further decline in crude prices.

Sell Feb $28 call, currently 37 cents, stop loss $26.45
Buy long Feb $31 call, currently 12 cents, no stop loss.
Net credit 25 cents.


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.