Yes, it is possible to end February with a rally. It is even more likely because the middle of the month was so negative.
Nobody can guarantee that the markets will rally higher from here but there are green shoots popping up all over that suggest we could be getting ready for a break over critical resistance.
The Russell 2000 and the S&P Small Cap 600 were the two biggest index gainers on Wednesday. The Russell made a complete round trip from support at 998 to resistance at 1,023 for a +10 point gain when the bell rang. That is critical resistance on the Russell and a breakout there could be the spark that ignites the rest of the market.
The Russell 2000 is the sentiment indicator for the rest of the market. If portfolio managers are buying small caps that is the all clear indicator for everyone else to board the train to higher levels.
If the Russell breaks out of its recent range, there is very little resistance until 1,150. That would be more than a 125-point gain and investors would be throwing money at the market to keep it from leaving without them.
I know that may only be a slim chance of occurring but the chart is telling us all the factors are lining up in our favor. While we could just as easily roll over and head for new lows on Thursday, we have to trade what we see and then get out of the way if we are wrong.
S&P futures have been down -4 and up +8 this evening and are +2 as I am getting ready to hit send on this newsletter. The Shanghai Composite is down nearly -4% so I am not surprised the futures have been volatile. Remember, you do not have to execute the trades listed in the newsletter if the market is crashing at the open. Be alert and look for signs of weakness before you pull the trigger. We only want to be short premium in a market with a bullish bias.
Finding anything with a trend today was crazy hard. With the market alternating directions almost daily with triple digit moves, the vast majority of stock charts were broken. There was no trend. With only 3 weeks left in March, any stocks that had a trend had no premium. I reached out to April on a couple of the Cash Machine positions in order to sell farther out of the money and find some premium.
Anyone receiving this newsletter can use any of the recommendations. Just because you may be a Cash Machine subscriber does not mean you cannot use the Option Writer plays. You have a lot more options in this newsletter format.
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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.
Monthly Cash Machine
February Play Recaps
Despite being a volatile month, the Option Writer portfolio ended with a gain. The short put on Valeant Pharmaceutical was the biggest loss when the stock gapped down when news broke the CEO was not coming back in the near future. The volatility in oil nicked us on the EOG short call. However, the market volatility worked in our favor on the VIX calls. I love it when the VIX spikes because you know it will always come back to earth.
The Monthly Cash Machine (MCM) portfolio ended with a loss primarily because of the volatility in oil. The XOP position was responsible for -$125 of the total loss. On the MCM the volatility in the market caused us to be stopped out of the IWM position for a minor loss.
Current Option Writer Position Changes
BABA - Alibaba (Stopped)
We attempted to reload the short call position last week and the opening spike on Thursday morning stopped us out again within seconds of entering the short call. We would have been stopped on Monday as well so it was good we got out for a breakeven.
Closed March $75 short call, entry .57, exit .57, breakeven.
Retain March $80 long call, entry .21, currently .08.
DAL - Delta Airlines (March - Stopped)
The airlines soared last week as the Transports rallied and oil prices continued to be weak. The short call for March was previously stopped out at $44.75. The long call is now profitable and the airlines may continue rising. I added a stop loss on the long call to capture some profit if Delta finally fades.
Retain march $52.50 long call, entry .15, currently .37, stop loss $47.65.
Monthly Cash Machine Play Updates
GLD - Gold ETF (Stopped)
We tried to reload the short strike on the March $145 call on the GLD. The price of gold spiked again on the 18th and we were stopped for another loss. The long strike using the $132 call is profitable and I am recommending we close it. GLD closed at $117.61 today and I cannot imagine is going much higher over the next three weeks. Note that the spike today sold off sharply. The $120 level is strong resistance.
Stopped March $125 short call, entry .63, exit .98, -.35 loss.
CLOSE March $132 long call, entry .17, currently .27.
NUGT - Gold Miners ETF (Stopped)
The Gold Miner ETF has been crazy for the last week. Despite the price of gold declining overall until today the NUGT has been rising almost daily. This morning the ETF spiked $8.50 at the open on a $22 spike in gold prices after Bank of America said gold could rally to $1,550. The gap up at the open gave us a really bad fill when our stop loss was hit. The long call is now profitable and I am recommending we close it. The $80 call is $24 OTM with three weeks remaining. The gain on the long call will help to offset the loss on the short call.
Closed March $70 short call, entry $3.35, exit $6.40, -3.05 loss
Close March $80 long call, entry $1.85, currently $3.20, +1.35 potential gain.
New Option Writer Recommendations
SNDK - SanDisk (Put Spread)
SanDisk is being acquired by Western Digital (WDC) for $19 billion. On Tuesday a group of Chinese investors pulled out of a deal to buy 15% of WDC for more than $3.7 billion. After the group pulled out WDC lowered its offer for SanDisk from $86.50 per share in cash and stock to $78.50 in cash and stock. SanDisk closed at $70. I am recommending we sell the 50/30 put spread for a net credit of 89 cents with three weeks to go before expiration. Even if SanDisk rejects the new offer, which I doubt they will, WDC will have to pay a breakup fee of $184 million. SanDisk has a revolutionary new flash memory technology that will be on the market soon and this will be a valuable addition to WDC disk drives. They could have a technological edge over Seagate (STX) for an entire product cycle if they conclude the deal.
Earnings April 13th.
Sell short March $50 put, currently $1.00, stop loss $59.50
Buy long March $30 put, currently .11, no stop loss.
Net credit 89 cents.
PII - Polaris Industries (Put Spread)
Polaris makes off road vehicles, snowmobiles and motorcycles. They compete with Arctic Cat and have 8,100 employees. They are about four times larger than ACAT. They had some earnings issues from the lack of snow but their motorcycle business helped smooth out the rough spots. They are about to break over resistance at $88, market permitting, after a post earnings dip to $68.
Earnings are April 26th.
Sell short March $80 put, currently .90, stop loss $83.75
Buy long march $70 put, currently .25, no stop.
Net credit 65 cents.
New Covered Call Recommendations
LNG - Cheniere Energy
Cheniere made history this week when they exported the first tanker load of LNG from the Sabine Pass terminal in Louisiana. After 7 years of construction the first export terminal is in operation with 7 more to follow in the years ahead. The Asia Vision tanker is owned by Cheniere and is headed to Brazil with the gas. Cheniere has six LNG tankers including the Asia Vision and two have been waiting in the Gulf for the exports to begin. The Asia Vision left today and the Energy Atlantic will immediately move up to receive the next load. This has been a long time coming for Cheniere and the stock popped 10% on the news. Obviously we are probably looking as some profit taking in the days ahead but the $30 call was so plump I could not pass it up. The $4.35 premium give us more than 10% downside protection and we can write another call in three weeks.
Earnings May 20th.
Buy-write LNG March $30 call, currently $33.62-$4.35, no initial stop loss.
YHOO - Yahoo Inc
Yahoo officially put itself up for sale this week with the hiring of JP Morgan and Goldman Sachs to find a buyer. Reportedly there are as many as six interested parties including Verizon, Time Warner and others. At long last there may actually be a bidding war for the Yahoo skeleton. The company is still the third most visited website on the internet with 200 million monthly average users.
Earnings May 5th.
Buy-write YHOO March $30 call, currently $30.95-$1.77, no initial stop loss.
Monthly Cash Machine Recommendations
IWM - Russell 2000 ETF (Put Spread)
The Russell has dipped twice to the 950 level and the last rebound was stronger than the other indexes. The buyers appear to be coming back to the small caps. If the Russell 2000 breaks over 1,040 it should be a race to the 1,150 range.
The IWM low on the 11th was $93.64.
I had to go out to April to find any premium that was not close to the money on the IWM.
Sell short April $90 put, currently 71 cents, stop loss $93.75
Buy long April $80 put, currently 18 cents, no stop.
Net debit 53 cents.
VXX - VIX Futures (Call Spread)
The VXX short-term futures have risen to $30 twice in the last six months. They traded at $18 for two months in the middle. The VIX has been elevated since mid January and the volatility should be about over unless the market rolls over soon and heads to new lows. The internals and the market action suggest there are buyers starting to show up in greater volume. The Russell 2000 is the market sentiment indicator and it appears about ready to break out of its recent range. I don't think we are going back to 30 for any appreciable amount of time.
I am recommending the April call spread. That way we do not have to worry about a sudden pop over the next three weeks. We do not have to wait until the spread expires. If the VXX returns to 18 the premiums will evaporate and we will close it early.
We do not need a stop loss because there is almost zero chance of a spike in volatility over 30 on the VXX that lasts for two months. Even if the market is declining or choppy the volatility can decline. It is only the 250 point gap down opens that really juice the VXX.
Sell short April $30 call, currently 99 cents. No stop loss.
Buy long April $40 call, currently 26 cents. No stop loss.
Net credit 73 cents.
Original Option Writer Recommendations (Alpha by Symbol)
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 (March 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.
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.
FB - Facebook (Put Spread)
The market correction has crushed all the air out of Facebook since their record earnings. There was a $13 spike after the earnings and it has been erased. Shares are back to long term uptrend support, which just happens to coincide with the 200-day average. Facebook has not closed under the 200-day since the middle of 2013. I think we should be safe with this one.
Sell short Mar $85 put, currently $1.27, stop loss $90.85
Buy long Mar $75 put, currently .45, no stop loss
Net credit 82 cents.
NFLX - Netflix (Put Spread)
Netflix gained +2.81 on Tuesday in a very choppy market. Shares failed to decline on Monday in a very negative market. I believe the $80 level is long-term support. With Mark Cuban going public with another big buy of Netflix shares late last week he might have turned the sentiment away from bearish. With shares at $85, I am recommending a put spread at $65. While i cannot conceive of share dropping that low without a bear market it is always possible.
Sell short March $65 put, currently 91 cents, stop loss $76.25
Buy long March $55 put, currently .38, no stop loss.
Net credit 53 cents.
NFLX - Netflix (Put Spread)
I hate to double dip but when weighing the risk versus the premium on various plays, Netflix kept floating to the top. We already have a put spread on Netflix but nothing keeps us from opening another one.
Earnings April 21st.
Sell short March $80 put, currently $1.20, stop loss $84.85
Buy long March $70 put, currently .44, no stop.
Net credit 76 cents.
PSX - Phillips 66 (Put Spread)
With Warren Buffett taking a big position in PSX last week the stock has rocketed higher. Investors following Buffett should continue to buy any dips. This is a cheap spread but should have relatively low risk unless the bottom falls out of oil prices again.
Earnings April 29th.
Sell short March $72.50 put, currently .80, stop loss $75.85
Buy long March $60 put, currently .20, no stop loss.
Net credit 60 cents.
PVH - PVH Corp (March - Put Spread)
We just exited a play on PVH after the stock spiked to nearly $80 on a new deal with GIII Apparel. Shares fell back to $69 in three trading days because Ralph Lauren (RL) warned on earnings. The Nasdaq implosion and a drop in retail in general also contributed. PVH has found support in the $70 range and with any positive market it should begin to move higher again. The deal with GIII Apparel could add $1 billion in revenue to PVH.
I am recommending a put strike that is $4 below the January market crash lows.
Sell short March $60 put, currently .85, stop loss $64.25
Buy long March $50 put, currently .35, no stop loss
Net credit 50 cents.
Monthly Cash Machine Positions
DIA - Dow ETF (March 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.
GLD - SPDR Gold shares (Call Spread)
Gold exploded higher over the last month from $1,056 to $1,191. The sudden interest in gold came from the meltdown in China and the weak economics in the USA. The Dollar index fell -4% from nearly 100 to 96. I think gold has reached its peak for this cycle. The $1,200 level was major resistance for four months back in early 2015. The equity market is oversold and due for a rally and the dollar is oversold and due for a bounce. The wild card here is Yellen on Wednesday. As long as she maintains the Fed stance as ready to implement gradual hikes for the next two years the dollar will recover.
I am recommending the March $125 call to short. That is the equivalent to $1,250 on gold. On the GLD that is $10 over strong resistance at $115.
Sell short March $125 call, currently .48, stop loss $118.65
Buy long March $132 call, currently .18, no stop loss
Net credit 30 cents.
IYT - Dow Transports ETF (Put Spread)
Low oil finally reached the point where the Dow Transports are in an uptrend after months in a bear market. Shares rallied today in a very choppy market. The airlines rallied because the WHO did not implement any global travel restrictions because of the Zika virus. Transports have been moving up for three weeks and the last three weeks have been very bad for the market. I am recommending a short strike that is well below the January lows.
Sell short March $110 put, currently .80, stop loss $118.45
Buy long March $100 put, currently .45, no stop loss
Net credit 35 cents.
NUGT - Gold Miners Daily Bull ETF (Call Spread)
The spike in gold prices saw the daily gold miners ETF rise to $56 last week. That was well above its recent range under $20 in January. With Goldman recommending shorting gold and the climax short squeeze behind us I am recommending we reach way out and sell the march $70 calls. That is $24 over Wednesday's close and a level not seen since last July. That was after a 1:10 reverse split so it has really been a lot longer. The daily ETF constantly bleed value because of the underlying futures roll over each month.
Sell short March $70 call, currently $2.75, stop loss $58.50, $2 over the high from Friday.
Buy long March $80 call, currently $2.10, no stop loss.
Net credit 65 cents.
QQQ - Nasdaq 100 ETF (Put Spread)
The Nasdaq 100 ETF has rallied over $102 on the three days of short squeeze. While I doubt the rally will continue in its present strength I find it hard to believe it will erase all its gains. I do expect some profit taking but the bulls smell the green rally grass and they are likely to buy the dips.
I am recommending a put spread using the march $91/$86 strikes. The low last week was $95.
Sell short March $91 put, currently 49 cents, stop loss $96.85
Buy long March $86 put, currently .23, no stop.
Net credit 26 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.
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.