The market does not have to go up and down on alternate days. It can actually go up more than one day at a time.
After two months of triple digit gains on one day being erased by triple digit gains the next, the market is actually making progress to the upside. After a textbook double bottom retest of the 1,810 level on the S&P the index has surged to close at 1,981 today after a +171 point gain.
There is always another resistance test in the near future but this time the 1,999 level is significantly higher than the last ones at 1,950 and 1,965. The worst would appear to be behind us. Any future tribulations should come in fighting our way higher rather than fighting to keep from going lower.
The months of March and April combine to produce some solid gains more often than not. It is the "Sell in May" cycle that comes after April that causes trouble.
The Super Tuesday contest did not project a clear nomination winner for either party but Clinton and Trump are far enough ahead that the uncertainty eased somewhat. Typically, a clear winner on Tuesday gives the markets hope and they rise over the next two months. The lack of a material decline on Wednesday suggests there was not a lot of consternation among investors.
We are out of the earnings cycle for another six weeks and the market uptrend has provided a lot of potential candidates. We do not really care which direction the market goes as long as it is consistent. However, a bull market is typically easier to play as premium sellers.
The ADP Employment report on Wednesday beat estimates and took some of the pressure off the Friday Nonfarm Payrolls. Investors now believe the jobs dip is behind us and the economy is improving. A strong jobs number on Friday will put the Fed back into play for the June meeting but there is little chance of a rate hike at the meeting on the 16th.
We got a bad fill on the Cheniere Energy covered call last week. Cheniere gapped open $1 and the option did not follow suit so the potential profit was squeezed by about $1. We will still post a gain but it is very small relative to the way the play was recommended.
The market uptick is producing a lot more covered call candidates so I will be including them in future newsletters until conditions change.
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
Current Option Writer Position Changes
DAL - Delta Airlines (Stopped)
The remaining long call on the Delta position was stopped out when the stock price dipped below $47.65 on the 29th. We were able to capture a minor gain on that option that would normally have expired worthless. That gave us a breakeven on that position and that is always better than a loss.
Closed March $52.50 long call, entry .15, exit .23, +8 cent gain.
Previously closed March $48 short call, entry .75, exit .82, -7 cent loss.
Monthly Cash Machine Play Updates
There were no changes in the current positions.
New Option Writer Recommendations
NFLX - Netflix (April - Put Spread)
We already have to put spreads on Netflix for March but there is nothing stopping us from repeating the plays using April strikes. Netflix consistently has higher option premiums than 95% of the stock with options. As long as it maintains a choppy upward bias that should continue.
Earnings April 21st.
Sell short April $80 put, currently $1.81, stop loss $86.50
Buy long April $65 put, currently .46, no stop.
Net credit $1.35
WYNN - Wynn Resorts (April - Put Spread)
Wynn has been surging higher after Steven Wynn bought 2 million shares in the open market ahead of the data for February out of Macau. Gambling revenue declined only -0.1% in February. That was the least in 21 months and much better than the -21.4% drop in January. The lunar new year had a lot to do with it but fortunes are improving.
Earnings April 28th.
Sell short April $70 put, currently $1.09, stop loss $74.85
Buy long April $55 put, currently .18, no stop loss
Net credit 91 cents.
New Covered Call Recommendations
WLL - Whiting Petroleum (Covered Call)
Whiting shares spiked on the rising price of oil and news that the company would present at the Raymond James Investor Conference on March 8th. This is strictly an oversold bounce play and capitalizing on the spike in the option price. At 80 cents it is 20% of the stock price and should give us some downside protection.
Earnings May 25th.
Buy write WLL Apr $5 call, currently $5.21-.80, no initial stop loss.
Net debit $4.41.
FOLD - Amicus Therapeutics (Covered Call)
FOLD spiked on positive data on two different phase 3 studies for new drugs. They are also presenting at the Cower Health Care Conference on March 9th. This is an oversold stock bouncing from strong support. The premium is 17% of the stock price for some great downside protection.
Earnings May 27th.
Buy write FOLD April $8 Call, currently $7.98-$1.40, no initial stop loss
Net debit $6.58
Monthly Cash Machine Recommendations
XBI - S&P Biotech ETF (April - Put Spread)
The biotech sector appears to be healing after a low in early February and a higher los last week. The close on the ETF on Wednesday was a six-week high. With the market in rally mode the biotechs have been providing support.
Sell short April $45 put, currently 90 cents, stop loss $47.65
Buy long April $37 put, currently 40 cents, no stop loss
Net credit 50 cents.
IYT - Dow Transports ETF (April - Put Spread)
The Dow Transports continue to climb after a year of steep losses. The economy appears to be edging away from a potential recession and the transports are celebrating. We already have a March put spread and I am adding an April spread to capitalize on the move.
Sell short April $125 put, currently $1.20, stop loss $129.35
Buy long April $115 put, currently .50, no stop loss
Net credit 70 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.
LNG - Cheniere Energy (Covered Call)
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.
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.
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.
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.
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.
YHOO - Yahoo Inc (Covered Call)
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 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.
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.
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.
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.
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.
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.