The market rested on Wednesday ahead of Yellen's speech on Friday.

The most volatile six weeks of the year started out with new highs on Tuesday on the Nasdaq and Russell and then a new three-week intraday low on the Dow on Wednesday. The Dow dipped to 18,448 and rebounded almost immediately.

The Nasdaq and Russell tanked hard after the biotech sector lost -3.4% on worries about price controls and patent attacks. Mylan was under pressure for raising the price of a life-saving EpiPen by 400% and Teva had some patents invalidated by a court that will allow generic competition sooner rather than later.


If the biotechs continue to weaken it could drag the Nasdaq and Russell significantly lower. However, with many of the individual biotech stocks down 5-7% on Wednesday the shock value move may be over. We could see further declines but they may not be as steep. Any government move to fix prices on drugs would not come until late in 2017 and that depends on who is elected. There would be stiff resistance on the grounds of free commerce.

The key to the current market is the Yellen speech on Friday. If she repeats her role as queen of the doves the market should move higher next week. If she begins to sprout a few hawkish feathers the market could move lower on worries the Fed could move in 2016 with the market currently expecting early 2017 as the next hike.

With volume averaging 5.6 billion shares a day this week, it is very light and any normal size order is pushing the indexes around like a fat finger trade. After Labor Day, the volume will increase and with it we should see some conviction in the move.

We should not try to add too many positions this week because it is a coin toss for direction and volatility will increase.

The Russell 2000 remains our market sentiment indicator and it is in a solid uptrend. As long as the Russell does not fall out of this channel the broader market should be ok.


The Volatility Index actually spiked slightly on Wednesday and premiums inflated on many stocks. If the VIX spikes back up to the 20+ level we will launch a new call spread on that index. I am just glad to see a little volatility return. I was tired of looking at 25-cent premiums and trying to figure out how to construct a play.

No covered calls today thanks to the one day market decline. Even the stocks with a bullish bounce tended to fade at the close and premiums shrank.

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


August Position Recap


We had a decent month in the August positions considering the market went sideways almost the entire period and volatility was extremely low. The key to August was the lack of any material losses. We had a limited number of positions because of the low volatility and the lack of market direction.


We had even fewer plays in the Cash Machine because of the low premiums and lack of direction. It was still a positive month so we cannot complain.




Current Option Writer Position Changes


TREE - Lending Tree (Stopped)

The long put on the TREE spread was stopped out on Tuesday when TREE spiked $9 to $109 and back over resistance. Because of the velocity of the spike the long put premium evaporated to nothing before the stop loss was hit at $107.30.

Closed Sept $80 long put, entry .33, exit .05, -.28 loss.
Previously closed Sep $90 short put, entry $1.68, exit $2.80, -1.12 loss
Net loss $1.40



WYNN - Wynn Resorts (Stopped)

The short side of the WYNN put spread was stopped out today when shares fell -6% on no news. Wynn officially opened the $4 billion Wynn Palace in Macau this week and today's drop was probably a sell the news event. Fortunately the long put rose by the same amount as we lost on the short put. We could close it today for a breakeven but given the velocity of the decline, I am going to put a stop loss on it rather than close it. Maybe we will get lucky and see support at $88 collapse.

Closed Sept $90 short put, entry $1.10, exit $1.61, -.51 loss
Retain Sept $80 long put, entry .29, currently .70.



Monthly Cash Machine Play Updates


IBB - Biotech ETF

The IBB fell -3.3% today on multiple negative events in the sector. Support at $288 broke to stop us out of the short side on the put spread. The biotech rally may be over as politicians and courts work to lower drug prices. This is the position where we got the bad fill on entering the play with the long premium more than the short premium.

Closed Sep $245 short put, entry .35, exit .30, +.05 gain.

Retain Sep $225 long put, entry .55, currently zero.



New Option Writer Recommendations


TSLA - Tesla Inc (Oct Call Spead)

Tesla is in a minor decline since the confirmation of the deal to acquire SolarCity. I do not see any catalysts on the horizon that could add $20 to the stock price but there is always that chance. The SolarCity deal should continue to be an anchor on the stock price. There are questions about corporate governance and today there was a question on why the officers in SolarCity were buying the company's debt. Lots of headlines and all are negative.

Earnings Nov 3rd.

Sell short Oct $240 call, currently $3.20, stop loss $233.
Buy long Oct $260 call, currently $1.03, no stop loss.
Net credit $2.17.



TAP - Moulson Coors (Oct Short Put)

In late July there was a hiccup in the planned merger of SABMiller and AB InBev. InBev sweetened the deal to make up the loss in the price after the drop in the pound and the SABMiller board reconfirmed their approval and the two biggest shareholders also approved. That means Moulson Coors is still in the mix with their $12 billion offer to buy SABMiller's majority stake in MillerCoors, the joint venture that sells Coors Light, Miller Genuine Draft and other SABMiller products in the U.S. and the stock rebounded. At this point there are no further roadblocks to the three way deal.

Earnings Nov 1st.

Sell short Oct $92.50 put, currently $2.05, stop loss $97.85.



Other Potential Plays (October Spreads, Covered Calls, Naked Puts)

These are not official plays but a good place to start if you are looking for something else to trade.

Expiration is October 21st.



New Covered Call Recommendations


No New Covered Calls


New Monthly Cash Machine Recommendations


The six weeks that started on Monday are the most volatile period of the year for the markets. Second half lows are normally made in September and October. The market is not showing any material indications of a pending decline but anything is possible. I am going to try and add a Russell put spread well out of the money. After Yellen's speech on Friday the market should turn directional next week. Which direction is the key question. We will have to wait and see.

IWM - Russell 2000 ETF (Oct Put Spread)

The Russell made a new 52-week high on Tuesday and then gave back all of Tuesday's gains on Wednesday. However, the Russell is still the most bullish index even though it has not yet made a new high. The Nasdaq was the leader but the implosion in the biotech sector could have derailed that leadership. The Russell has been moving slower but in a steadily bullish direction. Slow and steady wins the race.

Sell short Oct $111 put, currently .77, stop loss $118.50
Buy long Oct $103 put, currently .32, no stop loss.
Net credit 45 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.


ADRO - Aduro Biotech (Sept Covered Call)

Aduro reported earnings of 3 cents and analysts were expecting a loss of 5 cents. Revenue of $39 million easily beat estimates for $30.7 million. Shares closed at a 3 month high.

Buy write Sept $15 call, currently $15.09-$1.10, stop loss $13.85
Net debit $13.99


ALXN - Alexion Pharmaceuticals (September Put Spread)

Alexion reported adjusted earnings of $1.25 compared to estimates for $1.17. Revenue of $753.1 million also beat estimates for $742.5 million. The company guided for the full year to earnings of $4.50 to $4.65 on revenue of $3.05 to $3.10 billion. Shares shifted into rally mode after the July 28th release.

Earnings Oct 27th.

Sell short Sept $125 put, currently $1.75, stop loss $129.25
Buy long Sept $110 put, currently .70, no stop loss.
Net credit $1.05.


AVGO - Broadcom Ltd (Aug Put Spread)

Broadcom shares dipped to $142.50 on the Brexit crash. There is strong support at $140. I am picking the strike price just under that support at $135 for an August spread.

Earnings August 25th.

Sell short Aug $135 put, currently $1.30, stop loss $146.25
Buy long Aug $120 put, currently .45, no stop loss.
Net credit 85 cents.


CNX - Consol Energy (Sept Covered Call)

Consol Energy reported a big loss on Q2 earnings but investors are buying the stock with both hands. Along with earnings the company said it had sold its last remaining coal mines and is now out of the coal business. It also is finally putting drilling rigs back to work after having shut down drilling completely in 2015. This is positive on two fronts. They will have to pay $44 million to dump the coal mines off to someone else but they also lose $103 million in liabilities related to the mines.

Someone felt so positive about the future for CNX they bought 5,500 of the January $22 calls for $1.75 each or roughly $1 million in premium. I actually considered selling those as a covered call. If you bought the stock today at $19 and sold the $22 call for $1.75 that is a $4.75 gain if you are called in January or roughly 25% of the stock price today. That would be a great deal. I am going to be a little more short-term in the call I am recommending.

Buy-write Sept $20 call, currently $18.89-$1.07, stop loss $16.50
Return if called $2.18.


CYTR - CytRx Corp (Covered Call)

It is going to be very hard to lose money on this position. It is possible but not likely.

CytRx is a biopharmaceutical research and development company specializing in cancer drugs. They will be presenting three abstracts this weekend at the ASCO cancer conference. Shares have been jumping around between $2 and $3.50 since March. With the conference this weekend the options are high.

Earnings August 3rd.

Buy-write CYTR July $3 call, currently $2.93-$1.00. No stop loss.


GILD - Gilead Sciences (September Put Spread)

Gilead disappointed on earnings and reduced guidance but they are still making a tone of money. Their PE is 7 and they have more than $20 billion in cash. Shares fell -10% to $80 and have begun to rebound. Part of the problem was a transition from older Hep-C drugs to their newer drug with less side effects. Patients were waiting for the new drug that was just approved in June. That means the new drug will have huge sales in Q3 and offset the decline in the older drugs. The $81-$82 level has been support since January.

Sell short Sept $77.50 put, currently $1.30, stop loss $80.25
Buy long Sept $70.00 put, currently .30, no stop loss.
Net credit $1.00


MLM - Martin Marietta Materials (Sept Short Put)

MLM missed on earnings and revenue last week and shares dropped sharply. However, they remained bullish about the business and expected volumes over the rest of the year. Shares rebounded from the drop to $192 and closed over $200 on Wednesday.

Earnings November 1st.

Sell short Sept $190 put, currently $1.90, stop loss $195.50.
Buy long Sept $175 put, currently .55, no stop loss.
Net credit $1.35


NFLX - Netflix (September Put Spread)

Netflix crashed and burned after they reported earnings with a $15 drop. They have already rebounded $7 and analysts are starting to talk positively again in only 8 days.

Sell short Sept $85 put, currently $1.71, stop loss $88.
Buy long Sept $70 put, currently .20, no stop loss.
Net credit $1.51.


NXPI - NXP Semiconductor (Sept Short Put)

NXPI is on the verge of breaking out to a two month high over $90 thanks to the surge in the semiconductor sector. Volatility in NXPI shares tends to keep the premiums inflated but a break over $90 should deflate the puts in a hurry.

Earnings Oct 26th.

Sell short Sept $82.50 put, currently .75, initial stop loss $85.
Buy long Sept $75 put, currently .14, no stop loss.
Net credit 61 cents.


PANW - Palo Alto Networks (August Put Spread)

Palo Alto is a cyber security vendor that offers leading edge products to keep your data safe from the global hacker network. The consensus price target is $185 and shares closed at a 4-week high on Wednesday at $129.

Earnings August 30th.

Sell short August $120 put, currently $1.45, stop loss $124.75
Buy long August $110 put, currently .50, no stop loss.
Net credit 95 cents.


PVH - PVH Corp (Aug Put Spread)

PVH was at a 10-month high the Thursday before the Brexit results were announced. Because it had built up so much profit for traders it was crushed in the Brexit crash. It has rallied every day except one since that low and that was the Tuesday market drop. It was up $12 from the low so there were profits to be captured. It has very good relative strength.

Earnings 8/25.

Sell short Aug $85 put, currently $1.10, stop loss $89.50
Buy long Aug $75 put, currently .55, no stop loss.
Net credit 55 cents.


RIGL - Rigel Pharmaceuticals (Sept Covered Call)

Rigel reported a loss of 15 cents on Tuesday and analysts were expecting a 20 cent loss. Shares exploded higher after the company updated the news on its drug portfolio currently in development.

Earnings Nov 1st.

Buy-write Sept $2.50 call, currently $2.87-$1.10, stop loss $2.20
Net debit $1.87.


SIG - Signet Jewelers Ltd (August Put Spread)

Signet was crushed in late May and early June by news headlines about potential misdealing with customer goods in the store for repair. Several customers claimed their diamonds had been swapped out for lesser stones. The company waged a vigorous disclaimer campaign and shares are finally rebounding after putting in a bottom at $80.

Earnings August 25th.

Sell short Aug $80 put, currently $1.55, stop loss $84.65
Buy long Aug $70 put, currently .85, no stop loss.
Net credit 70 cents.


TREE - Lending Tree (Sept Short Put)

Lending Tree reported earnings of 92 cents that easily beat estimates for 70 cents. Revenue of $94.3 million fell short of estimates for $94.5 million but the big earnings beat caused that to be ignored. Shaes spiked from $94 to $105 on the news and are hlding in the $100-$105 range.

Earnings Oct 27th.

Sell short Sept $90 put, currently $2.45, stop loss $95.85.


TREE - Lending Tree (September Put Spread)

We have a successful short put play in progress on TREE and the option premiums are still inflated. With the stock making new highs I am going to double dip and add a put spread.

Earnings Oct 27th.

Sell short Sept $95 put, currently $1.30, stop loss $105.50
Buy long Sept $80 put, currently .65, no stop loss.
Net credit 65 cents.


ULTA - ULTA Salon (August Put Spread)

This is a high dollar stock that refuses to go down. This is a monster but the options are too expensive to play it on the long side. That gives us a short side opportunity well out of the money.

Earnings 8/25.

Sell short Aug $230 Put, currently $2.25, stop loss $239.50
Buy long Aug $210 put, currently .85, no stop loss.
Net credit $1.40.


VIX - Volatility Index (August Call Spread)

The odds are very good we are going to have some high volatility over the next several days as a result of the Brexit vote. The VIX spiked to $22 last Thursday and closed at $21 today. If we get a spike to $25 I want to launch a VIX call spread using the August strikes. There are only 3 weeks left in the July strikes and I do not want to get trapped in a July position if the volatility remains high but that is a very rare occurrence.

With a VIX trade at $25

Sell short August $25 call, estimated price $3.00, no stop loss.
Buy long August $35 call, estimated price $1.00, no stop loss.
Estimated credit $2.00.

Update 7/20/16: We closed the short side on the VIX call spread last Thursday in order to lock in a large gain and avoid any unexpected rebound in volatility. I am leaving the long side open even through it would take a black swan event to push the VIX back to its highs over the next three weeks. You never know what will happen.

Closed Aug $25 short call, entry $3.00, exit .25, +2.75 gain.
Retain Aug $35 Long call, entry .94. No stop loss.


WYNN - Wynn Resorts (September Put Spread)

Wynn Resorts is riding higher as the business in Macau is improving. Shares are about to retest resistance at $105 and could actually break out this time.

Earnings Nov 4th.

Sell short Sept $90 put, currently .94, stop loss $95.50
Buy long Sept $80 put, currently .23, no stop loss.
Net credit 71 cents.


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.


GLD - Gold ETF (Put Spread)

The Brexit vote has powered gold to a new high for this cycle and with European currencies dropping like a rock and money flowing to the USA in search of safety, several brokers believe it is going over $1,400. Currently there are 285,000 long contracts in the gold futures and only 25,000 short contracts. That suggests we could have a monster decline but there is nothing on the horizon to reverse the course of the European currencies because of Brexit.

Sell short Aug $121 put, currently 51 cents, stop loss $124.85
Buy long Aug $117 put, currently .19, no stop.
Net credit 32 cents.


IBB - IShares Biotech ETF (Sept Put Spread)

We already have a couple of positions on the XBI but I am adding a new one on the IBB because the dollar value of the ETF allows for premiums well away from the current price. The 3% decline on the XBI on Wednesday caused these premiums to be inflated slightly. If the IBB retraces enough to put us in danger, this position will be the least of our problems.

Sell short Sept $245 put, currently .55, stop loss $277.25>
Buy long Sept $225 put, currently .25, no stop loss.
Net credit 30 cents.


MDY - S&P-400 Midcap Index

The MDY dipped from the Thursday high at $276 to the Monday low at $256 in the Brexit crash. It has already rebounded to $267. The midcap stocks had been the strongest sector of the market before the crash and came within only 7 points of making a new high.

Sell short Aug $240 put, currently $1.15, stop loss $258.50
Buy long Aug $210 put, currently .45, no stop loss.
Net credit 70 cents.


MDY - S&P-400 Midcap ETF (Sept Put Spread)

We already have an expiring August put spread on the MDY. I am going to recommend we replace it with a September spread. The MDY has moved in a very narrow range for the last 7 weeks it refuses to decline although we did see an attempt to sell off with the broader market on Thursday. The dip was bought again.

If the market opens lower on Thursday, please do not enter this position. There is no reason to jump in front of a moving train.

Sell short Sept $265 put, currently .75, stop loss $277.85
Buy long Sept $245 put, currently .45, no stop loss.
Net credit 30 cents.


QQQ - Nasdaq 100 ETF

Despite the various movements in the indexes the index ETFs are not reflecting the moves. The SPY has traded in a very narrow two-point range for the last ten days. The market is either consolidating, coiling for a breakout or passing time before it crashes into the seasonal weakness in Aug/Sep. There are almost no option premiums. Fortunately, the Nasdaq has seen some gains in the last couple days so I am going to profile a QQQ trade.

The Nasdaq is in a positive trend compared to the other indexes. I am going to attempt to squeeze a put spread on the QQQ into the play list. Bear in mind that Amazon, Google and Baidu report earnings on Thursday after the close and they could change the direction very easily OR put the rally into overdrive.

Sell short Sept $108 put, currently .78, stop loss $111
Buy long Sept $100 put, currently .27, no stop loss.
Net credit 51 cents.


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

It is August but the market refuses to die. Contrary to normal seasonal patterns, it wants to continue higher. Despite this trend there are no premiums on the calls above the current level. All the premiums are in the puts so that tells us what investors are expecting. I am going to try and squeeze in a put position with a high stop well under the current levels. We will stop out before any damage is done if the market reverses.

Sell Sept $205 put, currently .70, stop loss $214.50
Buy long Sept $197 put, currently .33, no stop loss.
Net credit 37 cents.


XBI - Biotech ETF (Aug Call Spread)

The biotech sector rallied 16% in three weeks ahead of the ASCO cancer conference. Now that the conference is over those same stocks are starting to fade. The XBI hit strong resistance at $60 and is likely to decline over the coming weeks unless the broader market breaks out and overcomes the post ASCO depression.

Sell short Aug $65 call, currently $1.05, stop loss $61.50
Buy long Aug $70 call, currently .35, no stop loss.
Net credit 70 cents.


XBI - Biotech ETF (August Put Spread)

Now that the XBI is moving up strongly we can switch from a call spread to a put spread. The $50 level was support on both of the last two dips and should be support if another dip appears. I looked at a lot of individual biotech stocks this week and the vast majority are recovering from the post ASCO crash. Let's hope this continues.

Sell short August $50 put, currently 70 cents, stop loss $52.85
Buy long August $45 put, currently .27, no stop loss.
Net credit 43 cents.


XBI - Biotech ETF (Sept Put Spread)

The XBI closed at a new 6-month high and multiple analysts believe it will test resistance at $72 if not higher. They believe the bad news is already priced into the market. We have had pretty good luck on the XBI and I am going to try and squeeze in another play. It is the only index that is actually directional.

Sell short Sept $55 put, currently .42, stop loss $59.65
Buy long Sept $48 put, currently .11, no stop loss.
Net credit 31 cents.


XLE - Energy Select SPDR (Sept Quarterly Put Spread)

The option premiums are so small on all the regular September options I am going to recommend a quarterly expiration on the XLE. This option expires on September 31st instead of the regular expiration on the 16th. This gives us two more weeks and inflates the premiums by about 20 cents. Oil prices should continue to be relatively firm IF OPEC continues to talk up a potential production freeze agreement at the end of September.

Sell short Sept Quarterly $65 put, currently .57, stop loss $66.85
Buy long Sept Quarterly $60 put, currently .27, no stop loss.
Net credit 30 cents.


XOP - Oil Exploration ETF (Sept Put Spread)

Oil has been volatile over the last two weeks but the XOP has resisted dropping below support at $33. If it was able to hold that level with oil trading close to $39 it should hold on any further dips. Oil prices could return to less than $40 but analysts believe it will be brief. Some of the oil producers have actually turned in some decent earnings, all things considered. Exxon was not one of them.

Sell short Sept $30 put, currently .43, stop loss $32.45
Buy long Sept $25 put, currently .07, 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.