The indexes cannot decide if they want to go up or down and we are walking a thin line between resistance and support.

The Apple disaster hit the indexes at the open but the Dow and S&P managed to recover after the dovish Fed statement. However, the minor gains failed at prior resistance and afternoon trading was lackluster at best.

We are approaching that point in the earnings cycle when all the excitement fades. Since 1957, last week was the strongest week of the quarter. We are rapidly heading into the "sell in May" cycle where earnings fade and investor interest fades with it. Investors want to be able to go on vacations, enjoy the kids home from school and basically enjoy the summer rather than be worried about the day to day ebb and flow of the markets during the summer doldrums.

It is a proven fact that the six months beginning with May are the worst six months of the year for the market. The six months beginning with November are the best six months of the year. The sell in May strategy plays on those trends.

The markets could explode higher at any time. Summer rallies do happen but they are rare. When they do happen, they are more often than not the product of a rebound from a lackluster decline.

The problem today is that there is no trend. Option premiums on both calls and puts are deflated because of the lack of a trend. There are no premiums to sell calls because most investors do not believe the market is going higher. There are no put premiums because the market has not yet rolled over.

Stocks that have not reported earnings still have premiums but we cannot play them because of those impending earnings. Stocks that have already reported have deflated premiums because there is no expectation built into the premium. We already know what happened and traders have moved on to other companies. Stocks that have reported over the last two weeks have not yet developed a post earnings trend. Normally we can find some with negative trends to sell call spreads but we are still too close to the actual report for those trends to have developed.

The Dow is right on the verge of either breaking down or breaking out. Until that happens, we do not know which way to play. The same is true with the S&P and the Russell 2000. The Russell has been the strongest performer over the last two weeks but only managed to add 3 points today.


The S&P made a lower high last week and appears weaker than the Dow. We were stopped out of a SPY put spread on the Monday dip to 2,075. Like the Dow, the S&P is either going to break out or break down very soon. Until that decision is made we do not know which way to invest.


The Japanese economic data and monetary policy details are due out overnight. This could impact the U.S. markets tomorrow and Friday.

On a positive note, Facebook crushed earnings and spiked $10 after the bell. This should carry over as positive sentiment for Thursday. However, the S&P futures are barely positive at +2 as I type this. The Nasdaq futures are +11 and declining.

There is a lot of risk in selling premium during 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 and then there will be a lot of candidates to choose from.

The last week was rocky for the portfolio with sudden movements in multiple issues causing us to be stopped out. The next week could also be rocky so be prepared for abrupt changes in direction.

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


STMP - Stamps.com (Call Spread - Update)

Stamps.com changed their earnings date from May 26th to May 9th and that is before options expiration. Unfortunately, we cannot close the position because the market maker is not making a market in the options. The bid ask spread for the short call is 65 cents bid vs $2.00 ask. STMP closed at $93 today. The $125 short put is $32 out of the money and the option should already be worthless. However, STMP has a history of monster spikes on earnings so when they changed the date to before expiration the ask premiums went off the scale.

We have a couple options. We can become the market by putting in a limit order to buy for 50 cents and hope somebody takes us up on it. OR, we can hold through the earnings and hope that STMP fails to spike $30 after the release. The spiked $20 on the last report.

I am recommending we become the market and put in a limit buy for 50 cents. We sold the call for $2.28 so that would be a nice profit. However, I do not have a lot of confidence we will be filled. Given the current state of the general Q1 earnings the odds are good they will not surprise with the same quality they did last time. In addition, a lot of traders will be expecting a beat spike and that will limit its effectiveness. Since they have beaten estimates so severely over the last year, you can bet that analysts have spiked their estimates and it will be a lot harder to beat this time.

Their post earnings spikes also have a history of fading quickly so even if the shares do come close to $125 they may not remain there long. That would be a new high for STMP.

Place a limit buy order for 50 cents on May $125 call.



AMBA - Ambarella (Put spread - Stopped)

AMBA dipped on the 22nd to stop us out of the short side at $43.25 shares continued to decline to hit $41.11 today so the exit was timely. The long put has held its value and any further decline could bring it closer to the money. I am recommending we target $40 for an exit on the long side before the expiration pressures deflate the premium.

Closed May $40 put, entry $1.15, exit .90, +.25 gain
Retain May $35 put, entry .36, currently .25, target $40.00 for exit.



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

The FDA killed us on the Sarepta exit. They posted their working documents early on Thursday morning and the resulting drop in SRPT was expensive. Shares fell from $20 to $11 at the open and cost us $2 on the short put and $4 on the covered call.

The FDA had rescheduled a meeting on Sarepta's new MS drug for April 25th. The review was negative and SRPT fell again to $8. The next meeting is May 26th. The premiums have completely evaporated from SRPT options or I would recommend a new May position.

Short Put

Closed May $14 short put, entry $2.40, exit $4.60, -2.20 loss.

Covered Call

Closed SRPT shares, entry $22.91, exit $11.66, -11.33 loss
Closed May $23 short call, entry $7.90, exit $1.00, +$6.90 gain
Net loss $4.43.



NFLX - Netflix (Short Put - Closed)

Netflix is in crash mode. After nearly three months of an upward bias the shares have suddenly begun to decline sharply every day. The weak guidance for new international subscribers is to blame. I am sure a bottom will form soon but Tuesday's decline stopped us out of the short put position. The long side premium is rising and a couple more days of declines could put us back into a profit position. Support on Netflix is $80.

Closed May $90 short put, entry $1.50, exit $2.40, -1.12 loss.
Retain May $80 long put, entry .34, currently .42, no stop loss.



Monthly Cash Machine Play Updates


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

On Monday the S&P dipped to 2,077 and the SPY fell to 207.54 and stopped us out at 207.75 before rebounding back to $210. We exited the short put with a gain but the long put is still negative. The next week or so could be rocky so I am recommending we retain that put just in case the market rolls over again. So far the S&P has made a lower high rather than a higher high.

Closed May $199 short put, entry $1.15, exit .76, +.33 gain.
Retain May $192 long put, entry .49, currently .15.



New Option Writer Recommendations


PANW - Palo Alto Networks (May Put Spread)

Palo Alto provides enterprise level security to corporations, service providers and government entities worldwide. They offer advanced endpoint protection that prevents cyber attacks. Last 7 analyst ratings, either new or upgrades, have been to buy. Last week Morgan Stanley raised the price target from $171 to $185 with a buy rating.

Earnings May 26th.

Sell short May $145 put, currently $1.60, stop loss $148.85
Buy long May $135 put, currently .60, no stop loss.
Net credit $1.00.



NXPI - NXP Semiconductors (June Put Spread)

NXP Semiconductor provides high performance mixed signal and standard product solutions for radio frequency, analog and digital processing products worldwide. That means they make chips for cell phones and other communication devices.

The price target for NXPI was raised from $102 to $115 at Drexel Hamilton today after the company beat estimates for earnings. They posted earnings of 1.14 compared to estimates for $1.09 and revenue of $2.22 billion also beat.

Earnings July 25th.

Sell short June $80 put, currently $1.10, stop loss $83.85
Buy long June $65 put, currently .20, no stop loss
Net credit 90 cents.



New Covered Call Recommendations


No New Covered Calls


New Monthly Cash Machine Recommendations


No New Recommendations

The markets are too choppy to add any new plays on index ETFs. Since 1957, the prior week was the strongest week in the second quarter and the markets typically decline into summer. The indexes are at significant resistance and the earnings cycle will begin to wane after this week. That has lifted the markets to this point. While nothing prevents the indexes from moving higher the delicate balancing act at the current levels have reduced the call and put premiums to nearly nothing. There is no direction and should a direction appear it may be negative.

We were already stopped out of the May SPY put spread as the S&P dropped too close to our strikes.

The Volatility Index ($VIX) is flirting with 52-week lows. There is a volatility event in our future. Whether it is next week or three weeks from now, nobody knows but we do not want to have a lot of risk outstanding that we sold for pennies when this event happens.



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.


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


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


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


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.


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.


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.