The short squeeze on Tuesday powered the Dow to a 222-point gain but the sellers were back in force on Wednesday with a 217-point decline. Volume of 6.6 billion shares on Tuesday was light and 7.1 billion on Wednesday was still light but the highest in four days. Follow the volume. The market direction on the high volume days is the right direction. The last two days were close enough that we really cannot favor one over the other except that Wednesday's decline erased any favorable sentiment built up on Tuesday. The long-term trend should still be down.

The Dow is stuck in the middle of its recent range with a close at 17,711. Support is 17,500 and resistance 18,165 with multiple levels in the middle of that range for the index to act like a ball in a pin-ball machine bouncing from rubber to rubber.


I looked at a lot of charts today, probably in the 750 range, and I do not recall seeing so many ugly charts in a long time. The indexes do not currently reflect the overall instability in the market. The biggest of the big caps are holding the market up while a lot of smaller stocks are in free fall. The biotech index appears to be headed for a retest of the lows and that produces a major drag on the Nasdaq and Russell 2000.


There is a marked difference between the BTK above and the S&P below. If the BTK continues to decline it will eventually sink the S&P. The current support level to watch is 2,040 on the S&P followed by 2,020. A drop below 2,040 will cause a lot of traders to pull in their horns and start looking for a safe place to put cash for the summer.


On the positive side, we saw a sharp decline in crude inventories today. While the outage in Canada probably had a lot to do with it, we are at the point where inventories will begin to decline normally as summer demand increases rapidly. That should supply support to the sector and to the S&P.


Now that the earnings cycle is about over there were a lot more choices for new plays. However, despite rising volatility in the indexes, the premiums on individual stocks was still very low. We will have to settle for a lot of little premiums for the rest of the June cycle.

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

Monthly Cash Machine



Current Option Writer Position Changes


BHI - Baker Hughes (Short Put - Closed)

We close this position last Thursday after Halliburton and Baker Hughes called off their merger. Halliburton will pay BHI a $3.5 billion breakup fee.

Closed May $38 short put, entry $2.26, exit .16, +$2.10 gain.



AMBA - Ambarella (Put spread - Stopped)

The short put had been previously stopped and the long put had value. I put a stop at $38.75 last week and that was hit on May 6th to close the long put.

Closed May $35 long put, entry .36, exit .55, +.19 gain
Previously closed May #40 short put, entry $1.15, exit .90, +.25 gain.
Net gain 44 cents.



FDX - FedEx (Short Put - Closed)

FedEx dropped to our stop loss at $162.85 on May 5th and knocked us out of the short side of the position.

Closed May $160 short put, entry $1.16, exit $1.72, -.56 loss.
Retain May $150 long put, entry .36, currently .15.



PANW - Palo Alto Networks (Long Put - Close)

The long put on PANW has appreciated in value and time is running out. Closed the long put. The short put was previously stopped.

Close May $135 long put, entry .59, currently $1.50, +.91 gain
Previously closed May $145 short put, entry 1.83, exit $3.30, -1.47 loss.
Net loss 56 cents.



Monthly Cash Machine Play Updates


XBI - Biotech ETF (June Put Spread - Close)

The Biotech sector has rolled over and appears to be headed back to support. I am recommending we close the short put side of the position.

Close June $43 short put, entry .68, currently .55, +.13 gain
Retain June $38 long put, entry .21, currently zero.



New Option Writer Recommendations


WYNN - Wynn Resorts (June Put Spread)

Wynn Resorts beat on earnings despite the continued weakness from Macau. However, the decline in revenue from Macau has slowed significantly and the outlook is improving.

Earnings August 4th.

Sell short June $82.50 put, currently $1.55, stop loss $86.50
Buy long June $72.50 put, currently .39, no stop loss.
Net credit $1.16



CP - Canadian Pacific Railway (June Call Spread)

The Canadian railroad is going to be under a lot of pressure from the impact of the wildfire in Alberta. Lumber and oil shipments are going to be depressed. There will be delays and all manner of interruptions. It could be weeks before everything is back to normal. Earnings are going to suffer.

Earnings July 20th.

Sell short June $145 call, currently $2.20, stop loss $141.85
Buy long June $155 call, currently .65, no stop loss.
Net credit $1.55



N - Netsuite (June Put Spread)

Netsuite reported earnings that missed estimates but revenue was higher than expected. Shares retreated from their highs but found support at $75 after Credit Suisse put a buy rating on the stock.

Earnings July 28th.

Sell short June $70 put, currently $1.50, stop loss $73.85
Buy long June $60 put, currently .50, no stop loss.
Net credit $1.00.



New Covered Call Recommendations


WLL - Whiting Petroleum (Covered Call)

With the first decline in crude inventories for the summer demand season the energy stocks popped once again. Whiting has support at $10 and closed at $11. Crude prices should begin to move slowly higher as demand increases. May is the lightest month of the year and August the highest at 2.0 mbpd more than May. With the outage in Canada inventories should continue to decline.

Earnings July 27th.

Buy write WLL June $11 call, currently $11-$1.20, stop loss $9.75
Gain if called $1.20.



ETE - Energy Transfer Equity (Covered Call)

ETE owns 19,800 miles of natural gas pipelines in the USA and three gas storage facilities in Texas. They sell gas to utility companies, power plants, local distribution companies and industrial end users.

Earnings Aug 3rd.

Buy write ETE June $13 call, currently $13-$1.20, stop loss $11.85
Gain if called $1.20.



KS - Kapstone Paper (Covered Call)

Kapstone has been moving steadily higher despite the market weakness. The announced a 10 cent dividend today payable July 13th to holders on June 30th, after option expiration. Headquartered in Northbrook, IL, KapStone Paper and Packaging Corporation is the fifth largest producer of containerboard and corrugated packaging products and is the largest kraft paper producer in the United States. The Company has four paper mills, 21 converting plants and 65 distribution centers.

Earnings July 27th.

Buy write KS June $15 call, currently $15-$1.05, stop loss $13.85
Gain if called $1.05.



New Monthly Cash Machine Recommendations


XOP - Oil Exploration ETF (June Put Spread)

With oil prices likely to rise in the coming weeks due to inventory declines, I think it is safer to have two active spreads on the oil ETFs.

Sell June $29 put, currently .32, stop loss $31.85
Buy long June $25 put, currently .05, no stop loss
Net credit 27 cents.



DIA - Dow ETF (June Put Spread)

Expectations are for a declining market into June but the speed of the decline has slowed, except for today, and there is significant support at 17600, 17500, 17400. If it breaks those levels we could see 17,000. However, every dip continues to be bought. I am recommending a very low put spread and we will stop out well above our strikes if the market breaks those support levels.

Sell short June $165 put, currently .62, stop loss $169.50
Buy long June $159, currently .32, no stop loss.
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.


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


LNKD - Linkedin (June Put Spread)

Linkedin reported strong earnings, guidance and the internal components on users, page views, jobs, etc were also strong. Shares spiked on the news and then declined slightly in the weak market over the last two days. I believe they are going higher.

Earnings July 28th.

Sell short June $110 put, currently $1.38, stop loss $117.65
Buy long June $95 put, currently .28, no stop.
Net credit $1.10


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


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.


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.


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


STZ - Constellation Brands (June Put Spread)

Constellation blew out earnings in early April and spiked to $160. Since then they have traded in a $5 range with support at $155. Despite the weak market, shares have moved back up to $160 in the last week. I expect them to break out the next time the market turns positive.

Earnings June 30th.

Sell short June $150 put, currently $1.45, stop loss $153.85
Buy long June $135 put, currently .40, no stop loss.
Net credit $1.05.


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.


XBI - Biotech ETF (June Put Spread)

While the biotech sector is in decline, the index is approaching very strong support. On the XBI that support is at the $48-$50 level. I am recommending a spread below the February lows so without a total market meltdown we should be ok.

Sell short June $43 put, currently .70, stop loss $46.85
Buy long June $38 put, currently .25, no stop loss.
Net credit 45 cents.


XLE - Energy ETF (June Put Spread)

Crude inventories should begin declining over the next couple weeks as refiners kick into high gear to fill up the system with summer blend gasoline for the driving season. Typically when that happens the price of oil rises along with energy stocks. The decline in oil prices over the last couple days has been related to a rebond in the dollar rather than oil fundamentals.

Sell short June $58 put, currently, .56, stop loss $61.85
Buy long June $53 put, currently .20, no stop loss
Net credit 36 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.