So far, the earnings cycle has gone rather well with most companies beating "less bad" results. The bar was set so low that anyone could have beaten estimates as long as their business had any activity at all. The banks beat estimates even though their earnings fell from 40-60%. How can that be positive? Traders celebrated and the banks rallied.

We cannot expect that to continue in the weeks ahead. The smaller companies scheduled to report are more than likely going to have a tough time beating their lowered estimates. The S&P companies are forecast to see earnings drop -9.3% and revenue decline -1.4%.

The major indexes are testing upper resistance levels and appear destined to make new highs. When we get this close to a prior high, destiny takes over and traders chase prices knowing the market will make a new high. It becomes the very visible target and the entire market is focused.

Unfortunately, once that target is hit there is no secondary target because the market has never been higher before. Traders have no goal to focus on and they become listless. Many will take profits when that high is touched and then begin planning for the next decline.

The Dow rallied to 18,167 with major resistance at 18,165 and the selling was immediate. The Dow closed 70 points off its highs and back under 18,100. Nobody expected the Dow to just blast through that resistance and set a new high at 18,312 in one day or even one week but they do expect it to happen.


The S&P closed nearly 10 points off its intraday high at 2,111 to close at 2,102. These levels are strong resistance terminating at 1,128 from last June. Getting to a new high could be a real challenge for the S&P. The Dow is only 30 stocks so any 4-5 can push it higher on any day.


If I had my choice, I would not be selling premium in this market. With 85% of companies reporting earnings over the next four weeks and the major indexes at significant resistance, there is a really good chance the volatility is about to increase. Whether the market crashes or just moves around sharply is of course unknown but medium term, as in 4-6 weeks, it should head lower.

There are far too many factors that are against a continued rally. The Fed meets next week and is expected to predict a rate hike for June. The Brexit vote for Britain to leave the Eurozone is in June. The economic numbers are terrible with only 0.3% GDP growth in Q1. The only economic indicator posting gains is the payroll numbers and 85% of the jobs are part time.

There is a lot of risk in selling premium over an earnings cycle and this time that risk is elevated even higher. If you do not have to be in the market I would wait for a couple weeks until the market picks a direction after making a new high and then there will be a lot of candidates to choose from.

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


April Position Recap


The Option Writer portfolio had a good month in April. The market was directional and with the exception of the hiccup in Diamond Resorts and Whiting Petroleum, everything played out the way we hoped. We may not be so lucky in May. The volatility from thousands of earnings reports and the market testing new highs could produce some unexpected results in individual plays. Over the long-term we should always end up positive even if one month out of each quarter is a minefield rather than a golf course.


The Monthly Cash Machine portfolio also had a hiccup in the Biotech ETF when the sector collapsed in late March. By utilizing only index ETFs in this section of the newsletter we have been seeing some repeatable success. However, with the market in a possible topping phase we need to keep our stops tight in order to prevent a sudden decline erasing our gains. I am somewhat cautious about writing call spreads on the ETFs until the market actually rolls over. We are at that point where the market could fail OR blow through resistance and run for hundreds of points. Fundamentally, that does not seem likely but the market is rarely logical. I will continue to limit the number of plays in the Cash Machine section until the market goes directional again. I would rather have a few small profits than a lot of profits and losses that mess with our mind.




Current Option Writer Position Changes


VRX - Valeant Pharma (Short Put - Closed)

We closed the Valeant put last week after the headlines turned negative and analysts were starting to talk about a debt default. In retrospect nothing happened but it may happen at any time. I would rather be safe than sorry and we only lost 8 cents in the exit.

Closed May $25 short put, entry $1.77, exit $1.85, -8 cent loss.



AVGO - Broadcom (Put spread - Stopped)

AVGO rolled over on Tuesday to stop us out of the short put side of the spread at $152.50. The news was good and I could not see a reason for the decline. It was likely related to the IBM, INTEL earnings or the worry over Apple production cuts. I probably had the stop loss too tight but the AVGO options are very reactive to stock movement. Even just a little deeper on the decline and we could have lost money on the short put.

Closed May $135 put, entry .98, exit .87, +.11 gain
Retain May $115 long put in case of a disaster.



SRPT - Sarepta (Covered Call/Short Put - Close)

The FDA has rescheduled a meeting on Sarepta's new MS drug for April 25th. This is a very big meeting for Sarepta and the stock could move $10 in either direction on the news. The FDA normally posts its working documents on the web two-days before the meeting but sometimes earlier. Shares have already begun to fall as investors take profits ahead of the meeting. Rather than risk a bad result I am recommending we close both positions at the open on Thursday.

Short Put

Close May $14 short put, entry $2.40, currently $2.75.

Covered Call

Close SRPT shares, entry $22.91, currently $19.71, -$3.28
Close May 23rd short call, entry $7.90, currently $4.30, +$3.60 gain
Net gain 32 cents.



Monthly Cash Machine Play Updates


No Changes to Current Positions


New Option Writer Recommendations


NFLX - Netflix (May Put Spread)

Netflix can stream billions of hours of video but they cannot get the guidance right. They beat on earnings and guided higher on 4 of 5 metrics. That 5th metric caused a $14 crash in the stock price. After the gains going into the earnings cycle the stock was priced to perfection. Shares dipped to $93.14 at the open and was immediately bought to end the day at $96.77 on high volume.

I am recommending a May spread but you could also do the June spread. My only worry with a June date is that the broader market may (should) roll over before that expiration.

Earnings July 18th.

Sell short May $90 put, currently $1.61, stop loss $92.85
Buy long May $80 put, currently .38, no stop loss.
Net credit $1.23



FDX - FedEx (May Put Spread)

Shares are trading at a nine-month high after strong earnings in late March. The company said it was not worried about Amazon moving into the space because it would take tens of billions of dollars and years to achieve enough scale to be a threat. Fedex has 65,000 vehicles. Amazon has several hundred.

Earnings June 21st.

Sell short May $160 put, currently $1.13, stop loss $162.85
Buy long May $150 put, currently .35, no stop loss.
Net credit $.78



New Covered Call Recommendations


No New Covered Calls


New Monthly Cash Machine Recommendations


IWM - Russell 2000 ETF (May Put Spread)

It was tough finding a May spread that had any premium value. The steady move higher has evaporated all the put premiums but the call premiums are also flat because nobody expects the indexes to move over resistance.

The Russell moved over short-term resistance last week and is closing in on the 1,165 level which should be reasonably strong. If the big cap indexes can continue to move higher through resistance the Russell should do the same. The Russell has been one of the strongest gainers over the last six days.

This spread was as far away from the current price as I could get and still have a minimum 25-cent credit. I would NOT enter this position if the market is negative at the open on Thursday. I would wait until the Russell 2000 was positive before entering this spread.

Sell short May $107 put, currently 47 cents, stop loss $111.45
Buy long May $102 put, currently 18 cents, no stop loss.
Net credit 29 cents.



QQQ - Nasdaq 100 ETF (May Put Spread)

I was going to profile a May $105/$100 put spread but with Google, Starbucks, Biogen and Microsoft reporting after the close on Thursday, this could be dangerous. I am profiling it for the brave souls reading this newsletter who just have to have new positions. However, I would not enter it until Friday and only if the Nasdaq is positive after those reports.

THIS IS NOT AN OFFICAL RECOMMENDATION. ENTER AT YOUR OWN RISK.
There will be no follow up on this play description.

Sell short May $105 put, currently 48 cents.
Buy long May $100 put, currently 18 cents.
Net credit 30 cents.



Existing Option Writer Positions (Alpha by Symbol)

THESE ARE NOT CURRENT RECOMMENDATIONS. These are prior recommendations that are still active in the portfolio. Do NOT act on the plays described in this section. This is the archive of prior recommendations in the current portfolio.


AMBA - Ambarella (May - Naked Put/Put Spread)

Ambarella rebounded from a one day dip on Wednesday to return to the top of its recent range. If the positive market is going to continue we could see shares move higher from here. GoPro has been the biggest drag on Ambarella and GPRO rallied 19% on Friday on acquisition rumors and short covering.

Ambarella shares moved sideways through all the market volatility over the last two weeks with the exception of Tuesday. That is good relative strength.

Earnings June 2nd.

Sell short May $40 put, currently $1.20, stop loss $42.50

You could do a May put spread as an alternate strategy.

Sell short May $40 put, currently $1.20, stop loss $42.50
Buy long May $35 put, currently .40, no stop loss.
Net credit 80 cents.


AVGO - Broadcom Ltd (May - Put Spread)

Avago acquired Broadcom and changed the name to Broadcom but kept the AVGO symbol. This company now has a broad spectrum of offerings and wide customer base. Shares are breaking out to new highs and nobody can say anything negative about them. This is a put spread $20 OTM so even though this is a high dollar stock we will be able to stop out well before trouble can cause any damage.

Earnings may 26th.

Sell short May $135 Put, currently $1.00, stop loss $146.50
Buy long $115 put, currently .25, no stop loss.
Net credit 75 cents.


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.

Update 4/6/16: The U.S. sued BHI/HAL to block the transaction and the companies said they were going to fight it. I do not see this transaction completing based on the latest information. HAL is going to be forced to pay the $3.5 billion breakup fee but it would be months into the future. Be patient.

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


SRPT - Sarepta Therapeutics (May Covered Call)

We already have an April covered call on SRPT but the premiums are so high today we need to write another one. Shares rallied 20% today alone. Oppenheimer raised the price target from $45 to $60.

Previously: 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 May $23 call, currently $23.30-$6.80, initial stop loss $17.85.
Gain if called $6.50


SRPT - Sarepta (May - Naked Put)

We already have an April covered call on SRPT but the premiums are so high today I recommended we write another one. However, many readers do not like to own the stock because of the expense. I am also recommending this as a short put.

Shares rallied 20% today alone. Oppenheimer raised the price target from $45 to $60.

Previously: 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.

Sell short May $14 Put, currently $2.20, initial stop loss $17.85.


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


VRX - Valeant Pharmaceuticals (May - Naked Put)

Valeant has been beaten nearly to death but it is starting to show signs of as pulse. Bill Ackman reported his largest loss ever on Wednesday because of the decline in Valeant. However, he is now on the board along with several other activist hedge fund allies and they will turn the company around. It was even mentioned as a possible takeover candidate for Allergan. I believe the worst is over and shares will continue to crawl slowly higher. The Allergan CEO said he would love to buy the Bausch & Lomb brand from Valeant and that would be a way for Valeant to raise some quick cash.

Shares have rallied from $25 to $35 in two days and this could be the start of a major rebound. The stock fell from $263 to $25 in seven months. There is huge buying interest at $25. Every time it dips near that level the volume explodes higher.

Earnings June 14th.

Sell short May $25 put, currently $2.01. No initial stop loss. If it crashes again we will take the stock and write calls on it. I seriously doubt it is going to fail with Ackman on the board.


Existing Monthly Cash Machine Positions

THESE ARE NOT CURRENT RECOMMENDATIONS. These are prior recommendations that are still active in the portfolio. Do NOT act on the plays described in this section. This is the archive of prior recommendations in the current portfolio.


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.


IYT - Dow Transport ETF (May Put Spread)

Wednesday's short squeeze may have erased the negativity in the transports. The index had moved sideways for the prior week after a week of declines. This spike probably cleared out the remaining shorts.

Sell short May $133 put, currently .70, stop loss $136.45
Buy long May $124 put, currently .35, no stop loss.
Net credit 35 cents.


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

With the breakout to $208 on the SPY it shrank the premiums on the puts below the recent congestion band. We will have to be content with a 50 cent play. We do have support at $204 but plenty of resistance at $211.

Sell short May $199 put, currently $1.08, stop loss $203.50
Buy long May $192 put, currently .51, no stop loss.
Net credit 57 cents.


XBI - Biotech ETF (May Put Spread)

The biotech sector exploded higher this week after consolidating for two months. The cancellation of the Pfizer/Allergan deal left Allergan with $34 billion in cash and looking for acquisition candidates. The majority of stocks posted strong gains. The XBI blew through resistance at $54 and never looked back.

Sell short May $49 put, currently .80, stop loss $51.15
Buy long May $43 put, currently .30, no stop loss.
Net credit 50 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.