The markets finally reached the beginning of very strong resistance after a week of the lightest volume of the year. Now that we have reached the top, the battle for direction begins.

We had a good almost seven weeks of a directional market. The week before Easter and the Monday after contained four of the lowest volume days of the year. Monday of this week was the lowest volume of the year at 5.1 billion shares.

Yellen's speech signaled an all clear for the market and we have had two days of post speech gains. The Dow gapped open on Wednesday to 17,790 and right into the beginning of a major resistance band. With the Dow up +2,287 points from the February 11th low, it is very over extended. Just reaching that resistance band was a feat.

Sellers appeared immediately upon the touch of 17,750 and the Dow closed -74 points off its highs with a still decent 83-point gain. However, now that the resistance has been reached any further gains could be a challenge.


We are heading into earnings season and the earnings warnings are beginning to fly. To date 78% of the guidance we have received from S&P companies has been negative. Earnings are expected to decline -8.7% according to FactSet.

The GDP forecast for Q1 has declined from 2.7% growth in early February to only 0.6% and even lower than the 1.3% in Q4. Yellen's speech was peppered with comments suggesting the economic landscape was weaker today than it was in December.


If you combine weak earnings, weak economics and strong resistance, you should get a weak market in the weeks ahead. Today's resistance touch could have been a market high. The end of the quarter is over. Window dressing is over and stock buybacks are over. We are in a quiet period before earnings where buybacks are not allowed. In late May after the earnings cycle, the buybacks will be roughly 25% of what they were in February/March.

I believe we are setting up for a market decline or at least a very choppy top. In multiple newsletters, I have launched put plays on the SPY and the Russell IWM ETF. If I could sell call spreads on those indexes in this newsletter today I would do it but there was no premium. Apparently, the majority of traders believe the market is going to roll over and all the premium has evaporated. Puts have premium but only close to the money.

There is no conviction in either direction. April premiums have disappeared. With earnings starting in two weeks, the May premiums are higher but only on stocks that are going to announce earnings between now and the May expiration. That eliminates those stocks from consideration.

With market direction unknown but likely to be negative after the touch of resistance, I am electing not to launch any index spreads in the Cash Machine section of the newsletter. If I thought there was a chance of doing it profitably, I would be listing new plays. I could not find any plays where the risk/reward was in our favor. I did find one call spread and one covered call for the Option Writer section of the newsletter.

I hope I am wrong about market direction and next week will provide a different view of the market.

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.

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

Covered Calls

Monthly Cash Machine



Current Option Writer Position Changes


WLL - Whiting Petroleum (Covered Call - Stopped)

Whiting dropped sharply last week with a 20% decline in three days. We were stopped out at $6.75 on the 24th.

Closed WLL shares, entry $9.01, exit $6.75, -2.26 loss
Closed Apr $9 short call, entry $1.20, exit .18, +1.02 gain.
Net loss $1.24



Monthly Cash Machine Play Updates


Closing Positions

With the markets entering levels of strong resistance I am taking the precaution of closing most of the April index plays where premiums have declined to near zero. Check the portfolio graphic for the plays to be closed.


New Option Writer Recommendations


STMP - Stamps.com (May - Call Spread)

Stamps blew out earnings on February 26th and shares rallied from $96 to $120 on a monster short squeeze. Since early March shares have been sliding lower because traders understand that the next move will be at the May 26th earnings. They have gapped up after earnings for the last five quarters and then traded sideways or down for the rest of the quarter.

Earnings may 26th.

Sell short May $125 call, currently $2.10, initial stop loss $117.85
Buy long May $140 call, currently 65 cents. No stop loss.
Net credit $1.45



New Covered Call Recommendations


SRPT - Sarepta Therapeutics

Thirty-six experts in the field of Duchenne muscular dystrophy signed a letter to the FDA recommending approval of Sarepta's drug for DMD. There is already a large confirmatory study already underway to confirm the positive results in the initial studies. The head of the Jett Foundation is also urging accelerated approval of the drug. "Convincing 36 experts to sign a product specific letter was an incredible achievement by Sarepta." Earnings May 26th.

Buy-write April $20 call, currently $19.27-$1.25, initial stop loss $17.35.
Gain if called $1.98



Monthly Cash Machine Recommendations


No new plays


Original Option Writer Recommendations (Alpha by Symbol)


BHI - Baker Hughes (July - Naked Put)

Baker Hughes is being acquired by Halliburton. They have received all the regulatory approvals except for the U.S. and EU. The EU regulators had set a date of not later than July 11th for a decision. However, they stopped the clock again on Monday because of some missing data needed from Halliburton. Halliburton is submitting a package of divestitures to satisfy their requirements and gain approval. Once Halliburton submits the data the clock will restart. The date expands by one day every day the data is not complete so today the date is July 15th and counting. If HAL cannot gain approval there is a $3.5 billion breakup fee due to Baker Hughes.

The price HAL is paying for BHI is 1.2 Halliburton shares plus $19. Based on today's prices that is $58.23 and BHI closed at $44.96. In other words, if the EU approved the deal tomorrow, BHI shares would rocket to something close to $58.

If the EU fails to approve the deal as presented Halliburton has an extreme incentive in the $3.5 billion breakup fee to make the changes needed to get the deal done. The U.S. is pressuring Halliburton to sell more assets. HAL/BHI have offered to sell $7.5 billion in noncore assets. Once the EU approves the deal I would expect HAL to cough up some more assets and the U.S. approval could be acquired quickly.

This is going to be a long-term play. I originally planned it for the July strikes. After the events this week I am going to make it a May position and as we get closer to May we can also sell a July position and double dip. While no position is foolproof, this one should be relatively safe. Annual revenue for BHI was $15 billion in 2015 and it was a bad year. They have already written off all their nonperforming assets and made massive layoffs. Receiving a $3.5 billion beak up fee with oil prices rising would be a major lift for the company. Either completing the merger or not completing the merger the share price should move higher.

The $38 strike would be a four-year low. Earnings are April 21st but should not matter.

Sell short May $38 put, currently $2.10, no initial stop loss.


CVX - Chevron (April - Put Spread)

Chevron exploded out of the starting gate on Wednesday with a $4 gain after the company said they were slashing capital expenses, raising production and the dividend was secure through 2017. Having crude prices rise to a 2016 high at $38 did not hurt either.

Earnings Apr 29th.

Sell short April $85 put, currently $1.04, stop loss $86.85
Buy long April $75.00 put, currently .21, no stop loss.
Net credit 83 cents.


DIS - Disney (April - Put Spread)

Disney's new movie Zootopia is smashing records at the box office and several more movies will be out in the next couple months. Shanghai Disney will also open in the spring to as many as 100 million visitors in the first year. Profits are guaranteed for the mouse house.

Earnings May 3rd.

Sell short April $92.50 put, currently .96, stop loss $94.85
Buy long April $85 put, currently .26, no stop loss
Net credit 70 cents.


DRII - Diamond Resorts (Covered Call)

Diamond Resorts is rumored to be planning to take itself private in a leveraged buyout as the result of a previously announced strategic review. Analysts are expecting a deal price in the $32-$35 range. The company has a network of 375 vacation destinations in 35 countries. The firm hired Centerview Partners to evaluate all strategic alternatives after two major shareholders requested the board take action including an outright sale. Marriott Vacations Worldwide and Wyndham Worldwide could be suitors. More than 23% of DRII shares are sold short.

Earnings May 25th.

Buy-write DRII April $25 call, currently $23.42-$1.90, no initial stop loss.
Net debit $21.52, gain if called $3.48 or 16%.


HLF - Herbalife (April - Put Spread)

After the company beat earnings on the 23rd and said they were discussing a settlement with the government the stock has been climbing. Even a database error several days later that misstated the number of new members failed to hold it back for more than one day. Shares are poised to break out to a new 52-week high.

Earnings May 5th.

Sell short April $50 put, currently .79, stop loss $53.55
Buy long April $40 put, currently .29, no stop
Net credit 50 cents.


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


PII - Polaris Industries (April - Put Spread)

Polaris has been moving steadily higher until today when traders took some profits in a weak market. I believe the trend will resume once the market recovers. They made an excellent acquisition a couple weeks ago that will be very beneficial for vehicles in the business space.

Earnings are April 21st.

Sell short April $90 put, currently .85, stop loss $93.85
Buy long April $80 put, currently .20, no stop loss
Net credit 65 cents.


SM - SM Energy (Covered Call)

SM is the same story as WLL. Strong short squeeze on rising oil prices. When oil prices faded last week the equity prices barely dipped.

Earnings May 24th.

Buy-Write SM April $20 cov call, currently $18.95-$1.75, stop loss $14.15
Gain if called $2.80


SNA - Snap On Inc (April - Put Spread)

Snap On is rebounding strongly from the February dip with support from last week at $150. They posted earnings of $2.22 compared to estimates for $2.16 and declared a quarterly dividend of 61 cents. Shares took off and have gained $20 since the event.

Earnings April 21st.

Sell April $145 put, currently $1.00, stop loss $149.45
Buy long April $130 put, currently .40, no stop
Net credit 60 cents.


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.


WLL - Whiting Petroleum (Covered Call)

We already have a covered call on Whiting at $5 but shares have spiked to more than $8 and we can add another one for those readers that missed the first one. Oil prices have broken over resistance at $38.50 tonight and shares of energy stocks are likely to spike up again at the open.

Earnings may 25th.

Buy-Write WLL April $9 call, currently $8.67-$1.00, stop loss $6.75
Gain if called $1.33.


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.


Monthly Cash Machine Positions


DIA - Dow ETF (May - Put Spread)

The Dow has rebounded from 15,500 to 17,500 over the last five weeks. The index is facing significant resistance over that level but is showing no indications of a decline. I do expect some choppy trading in the 17,500-18,000 range and the eventual failure as we head into summer.

I am recommending a 162-155 put spread on the DIA because I do not expect the Dow to decline that far in the next six weeks. If it only remains in the 175-180 range for 3-4 weeks we will be able to close the spread for a profit long before the May expiration.

Sell short May $162 put, currently $1.08, stop loss $167.50
Buy long May $155 put, currently 63 cents, no stop.
Net credit 45 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 (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.


QQQ - Nasdaq 100 ETF (April - Put Spread)

The Nasdaq accelerated higher on Wednesday and closed at the high for 2016. Nasdaq futures are up +13 overnight and tech stocks appear to be the favorite post Fed fare. I looked at a lot of charts today and they were up the strongest.

Sell short April $100 put, currently .43, stop loss $103.35
Buy long April $93 put, currently 11 cents. No stop.
Net credit 31 cents.


SPY - S&P-500 ETF (April - Put Spread)

We had an expiring March put spread on the SPY. With the market moving higher and breaking through resistance level we can put on a new April SPY spread to replace the one that is expiring this week.

Sell short April $190 put, currently $.61, stop loss $195.65
Buy long April $184 put, currently $.31, no stop.
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.


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.


XLE - S&P SPDR Energy ETF (April - Put Spread)

The rise in oil prices have caused a massive short squeeze in most energy stocks. The energy ETFs are on fire. With inventory build season ending in three weeks the price of oil is likely to dip some but remain relatively firm. Energy equities should also remain firm with only a little profit taking. OPEC members and Russia are meeting in Moscow on March 20th to formerly agree on a production freeze.

Sell short April $53 Put, currently .42, stop loss $56.35
Buy long April $48 put, currently .16, no stop loss.
Net credit 26 cents.


XLV - S&P Healthcare ETF (April - Put Spread)

The Healthcare sector has rebounded from the January lows because the boomer generation is getting older and requiring more healthcare. The political winds may be blowing but senior healthcare is going to be another third rail of election politics. Don't threaten it or we will not vote for you.

Sell short April $63 put, currently .42, stop loss $65.85
Buy long April $58 put, currently .12, no stop loss
Net credit 30 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.