The markets finally decided to rally and in the low volume environment, the results were dramatic.

In three days the major indexes have gone from threatening to break down to new lows to threatening to break out over strong resistance. Unfortunately the gains crushed the volatility and the VIX is back at 13 and option premiums have deflated to almost nothing.

You would expect the call premiums to be inflated after two days of strong gains but even one strike out of the money many of the premiums are only 50-75 cents. Investors do not expect the rally to continue or the premiums would be higher. Of course in a bullish market the put premiums have shrunk as well.

Since we are out of the earnings cycle there is no expectation in the June premiums and that also removes much of the premium. The only stocks I could find today that had premium I liked were AVGO, PANW and ULTA and they all have earnings in the coming days so there was expectation in those options.

The Dow blew through resistance at 17,750 and came close to resistance at 17,925. This is very strong resistance and with very low volume, the institutional traders and funds can push the indexes around. We could easily test 18,000 if they so desired. The rest of this week could be dangerous. By that I mean we could move quickly in either direction or we could just go dormant until next Wednesday. This is a good week to watch from the sidelines.


The S&P has a similar pattern. We came close to testing resistance at 2,100 today and could easily return to that level tomorrow. While I do not believe we are going to breakout to new highs, I did not believe we would be moving higher from 2,050 either. What I believe does not matter to the market.


Shorts are running for cover but it is still a low volume move. The 6.4 billion shares today was the second lowest day since March. Monday was the lowest day of the year.

Despite the volatility, the market is still not directional. We continue to move in the same range we have had since the beginning of April. Until that range breaks the premiums will remain low.

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


May Position Recap


May was a rocky month for selling premium. With triple digit moves in both directions on alternating days the volatility peaked and dove on a day to day basis. Prior winning stocks like Apple and Netflix cratered while the markets were rising. We took come big losses when the FDA preannounced a decision on Sarepta and the stock gapped down 50%. Offsetting that was a big gain in Palo Alto networks when the long put appreciated significantly.


The Cash Machine portfolio for May saw every position stopped out. I kept raising the stop losses to prevent large retracements and the strategy worked. Because of the volatility, I recommended less positions and that kept us from accidentally getting hit with a big loss.




Current Option Writer Position Changes


WYNN - Wynn Resorts (Short Put - Closed/Reload)

Last week I recommended closing the short put on the WYNN spread because the stock was breaking down. The stock gapped lower on Thursday to $87.25, we closed the put, and that was the low for the month. The stock immediately sprinted higher to close at $97 today. Since we still have an offsetting long put I am recommending we sell a new put on WYNN to recover our loss.

Sell short June $87.50 put, currently .84, stop loss $90.50

Closed June $82.50 short put, entry $1.43, exit 2.05, -.62 loss.

Retain June $72.50 long put, entry .43, currently .05.



ETE - Energy Transfer Equity (Covered Call - Stopped)

ETE was cruising along just fine until yesterday when the bottom fell out. ETE and Williams (WMB) have an agreement where ETE will acquire Williams for $33 billion. The deal was done last June and energy prices continued to plummet for the next nine months and reduced the $33 billion deal to $20 billion. Williams filed suit against ETE claiming they were trying to get out of the deal by using an unresolved tax matter as an excuse. ETE counter sued. Both companies have a shareholder vote on June 27th to approve the deal and the drop dead date is June 28th. The filing of the suits caused the stock to collapse and we were stopped out on the position.

Closed ETE shares, entry $13.27, exit $11.85, -1.42 loss
Closed June $13 call, entry $1.45, exit .40, +1.05 gain.
Net loss 37 cents.



Monthly Cash Machine Play Updates


QQQ - Nasdaq 100 ETF (June Call Spread - Stopped)

The easiest way to get a sustained market bounce is to sell calls on an index ETF. The Nasdaq had been declining since April 19th and suddenly this week it took flight and traded up to $109.50 from the $104.50 where we launched the position last week.

We were stopped out of the short call and I am recommending we close the long call while it has some value. I seriously doubt the markets are going much higher.

Closed June $109 short call, entry .46, exit .71, -.25 loss.
CLOSE June $112 long call, entry .08, currently .27, +.19 gain.



SPY - S&P-500 ETF (June Call Spread - Stopped/Reload)

Who knew the SPY was going to sprint 6 points higher in only 4 days to stop us out? The S&P blew through resistane at 2,075 and touched 2,095 today. That knocked us out of the $211 short call. We can sell a $213 call with strong resistance at $211 to recover the 56 cents we lost on the initial position. That of course assumes the market is not going higher and we will have to put a tight stop on it.

Sell short June $213 call, currently .57, stop loss $211.05

Closed June $211 short call, entry .49, exit $1.05, -.56 loss.

Retain June $215 long call, entry .12, currently .23.



New Option Writer Recommendations


AMZN - Amazon (June Call Spread)

Amazon shares appear to have topped out in the $710-$720 range at least temporarily. They have been on an explosive run since the earnings in April. With the summer doldrums ahead I am going to recommend a high call spread.

Earnings July 28th.

Sell short June $750 call, currently $2.23, stop loss $730.00
Buy long June $765 call, currently $1.07, no stop loss.
Net credit $1.16.



TSLA - Tesla Motors (June Put Spread)

Tesla just sold $2 billion in stock in a secondary offering at $215 and did not have any trouble placing the shares. The odds are very good we are not going to see a big decline with that kind of demand.

Earnings Aug 3rd.

Sell short June $195 put, currently $1.40, stop loss $202.50
Buy long June $175 put, currently .40, no stop loss.
Net credit $1.00.



New Covered Call Recommendations


No New Covered Calls


New Monthly Cash Machine Recommendations


MDY - Midcap SPDR ETF (June Put Spread)

Midcap stocks have been strong, even more so than the small caps. The midcap index is only 1 point away from a 10-month high. We have not tried this ETF before but it was the only one with any premium at a relatively safe strike this week.

Sell short June $255 put, currently .50, stop loss $261.50
Buy long June $240 put, currently .20, 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.


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


EGRX - Eagle Pharmaceuticals (June Put Spread)

Eagle posted a terrible earnings report on May 9th but their guidance was strong. Their lead drug hit 71% total market share and 77% market share among hospitals and clinics. They partnered with Teva on the drug and Teva is doing the marketing Teva feels confident it will hit 90%. They also entered into an agreement to sell diclofenac-misoprostsol to a third party for $1.75 million and a 25% royalty on the net profits. Shares are exploding higher.

Earnings Aug 11th.

Sell short June $35 put, currently $3.30, stop loss $39.25
Buy long June $25, currently $1.15, no stop loss.
Net credit $2.15.


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.


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


MDVN - Medivation (June Put Spread)

Medivation is under attack by Sanofi. They are trying to buy the company for $52.50 despite the valuation being much higher. Medivation will not meet with Sanofi or open their books. Sanofi said they would raise the bid if Medivation would talk to them. Meanwhile Medivation is talking to Pfizer, Amgen and AstraZeneca about a possible white knight acquisition to save Medivation from Sanofi.

Sanofi is going to propose a slate of 8 directors to replace the entire Medivation board. Analysts claim a fair price would be in the $63 to $71 range.

Earnings August 4th.

Sell short June $55 put, currently $1.50, stop loss $58.50
Buy long June $45 put, currently .51, no stop loss.
Net credit 99 cents.


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.


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.


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.


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.


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


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 (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.


QQQ - Nasdaq 100 ETF (June Call Spread)

The market appears to be headed lower and on each of the recent short squeezes the QQQ has failed at $107. Support at $105 is likely to break before the week is out.

Sell short June $109 call, currently .49, stop loss $107.45 (three-week high)
Buy long June $112 call, currently .09, no stop loss.
Net credit 40 cents.


SPY - S&P-500 ETF (June Call Spread)

The S&P has made a series of lower highs and lower lows and broke critical support intraday today at 2,040. ($204). We are heading into the end of May and into the summer doldrums after Memorial Day. The S&P is likely to break that 2,040 level this week and move lower. The three week high on the SPY is just over $208. We had three monster short squeezes over the last three weeks and none of them lasted more than 1 day. The path of least resistance is down.

Sell short June $211 call, currently 58 cents, stop loss $208.50
Buy long June $215 call, currently .13, no stop loss.
Net credit 45 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.


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.


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.