The volatility may be driving you crazy but there is no reason to commit suicide. Step away from the ledge.

For three months the market exhibited almost zero volatility and moved sideways in clearly defined patterns. Over the last week that pattern has been broken and volatility has spiked significantly. The VIX has risen from the high 12s to 20 and the spike may not be over. We could easily hit 25 over the next week under the right conditions.


The market has gone directional with a significant decline over just the last four days. The Clinton presidential convoy took a wrong turn with the discovery of 650,000 emails on the laptop of her top aide over the last 20 years. Her poll numbers are dropping rapidly and Trump is gaining ground in all the right places. It will still be a close race but portfolio managers are running for cover.

The market wanted a Clinton win with the republicans holding the house and senate. That would have assured the status quo and continued legislative gridlock for the next two years. A Trump presidency is unpredictable. Managers do not know what to expect because of his vows to change everything.

At this point, a Clinton victory could easily produce a 5% rally. A Trump victory could produce another 5% decline because of the economic uncertainty. Any decline would be temporary and there could be some serious market swings as positions are swapped for others.

The most important chart tonight is the Russell 2000. The small caps are imploding because of their limited liquidity and fund managers are racing to exit high-risk positions before the election. The small caps are leading the market lower and the index is unsupported until about 1,100.


The S&P has followed the Russell down and broke critical support at 2,120. The next material support is 2,140 with 2,043.94 the closing level on Dec 31st. Under 2,043 and the S&P is negative for the year and could trigger some additional selling.


The problem we face as premium sellers is that we have a four-day decline that could reverse sharply at any moment in a monster short squeeze. It would be foolhardy to expect the decline to continue just as it would be unwise to expect it to suddenly reverse. We could see continues sharp declines interspersed with sharp rebounds. With everyone expecting a 5% market move but unsure of the direction, we would be wise to remain on the sidelines until at least next Wednesday. Hopefully by Wednesday evening we will know who won and that will remove some of the uncertainty.

We tend to forget that the object of the game is to make money, not trade every day. In baseball, you do not swing at every pitch. You have to wait for the right one in order to be successful.

Eventually the market will pick a longer term direction and our life will be a lot easier.

The S&P futures opened down -6 and then rallied to +3 are now back at unchanged.

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.

Lines in blue were previously closed.

Current positions

Covered Calls

Monthly Cash Machine



Current Option Writer Position Changes


NTES - Netease (Short Side Stopped)

The Chinese gaming stocks and any stock with large recent gains was hit hard over the last four days. We were stopped out at the beginning of the decline at $259.25.

Closed Nov $210 short put, entry $2.70, exit .50, +2.20 gain.
Retain Nov $190 long put, entry .95, currently zero.



SINA - Sina Corp (Short Side Stopped)

Chinese stocks and any stock with large recent gains was hit hard over the last four days. We were stopped out at the beginning of the decline at $75.25.

Closed Nov $70 short put, entry $1.60, exit 1.55, +.05 gain.
Retain Nov $60 long put, entry .30, currently .34, stop loss 72.05.



Monthly Cash Machine Play Updates


SPY - S&P-500 ETF (Short Side Stopped)

I am sure it is no shock that the S&P put spread was stopped out on the short side with the SPX falling -50 points in the last several days. Fortunately, the long put was relatively close and one more day of big declines and we could actually make money on this position.

Closed Nov $205 short put, entry $1.03, exit $1.44, -.41 loss.
Retain Nov $197 long put, entry .37, currently .62, stop loss $211.35



New Option Writer Recommendations


TREE - Lending Tree (December Put Spread)

TREE posted good earnings but the revenue was just under the estimates. The stock sold off hard but has rebounded for the last four days in a weak market. Banks and mortgage companies should do well heading into December with the Fed pointing to a potential December rate hike.

Earnings Dec 27th.

Sell short Dec $70 put, currently $1.40, stop loss $74.85
Buy long Dec $60 put, currently .60, no stop loss.
Net credit $.80.



Other Potential Plays (Nov/Dec 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.

November expiration is the 18th.
December expiration is the 16th.



New Covered Call Recommendations


No New Covered Calls


New Monthly Cash Machine Recommendations


No New Plays

The market is far too volatile to try and launch new plays on index ETFS. The S&P and Russell 2000 are at 4-month lows and approaching very oversold. However, analysts are predicting a 5% to 10% market move depending on the outcome of the election. That is great as long as we wait until the Wednesday after the election to launch new plays. It would be suicide to try and pick a market direction over the next five days.


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.


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.

CytRx received some bad news on a drug trial and the stock gapped down to 65 cents. We are waiting for some positive news to inflate the stock and we will sell a new call.


NFLX - Netflix (November Call Spread)

Netflix posted blowout earnings and the stock rocketed to $129 over the next five days but has started to fade. There will probably be some more buying over the next three days for window dressing but I doubt it will be enough to push it significantly higher. The stock has gained $27 or 27% since earnings last week. Funds will be taking profits next week after October is over and they close the books on the 2016 fiscal year.

Earnings Jan 16th.

Sell short Nov $135 call, currently $1.50, stop loss $130.50.
Buy long Nov $145 call, currently .43, no stop loss.
Net credit $1.07.


NTES - Netease (Nov Put Spread)

Netease has a great chart and they just renewed their deal with Activision last week to sell video games in China through 2020. That lifted the shares off $240 and with any positive market, we could see new highs.

Netease has earnings on Nov 15th, 3 days before expiration so we will need to exit early if we ar enot already out.

Sell short Nov $210 put, currently $2.30, stop loss $233.50
Buy long Nov $190 put, currently $1.15, no stop loss.
Net credit $1.15


SINA - Sina Corp (November Put Spread)

Sina has flat lined in the $75-$80 range for the last 6-weeks with a very slight upward bias. Analysts are sharply raising Sina price targets because of the company's ownership stake of Weibo Corp (WB) often called China's Twitter. Weibo had 318 million active users at the end of July and will probably have more than Twitter when they next report. Brean Capital just raised the price target on SINA from $65 to $100 to account for the increase in Weibo. WB shares have risen from $12 to $52 since February.

Earnings Nov 17th. One day before Nov options expire.

Sell short Nov $70 put, currently $1.38, stop loss $73.50
Buy long Nov $60 put, currently .36, no stop loss.
Net credit $1.02.


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.


IBB - Ishares Biotech ETF (Nov Put Spread)

The IBB is testing resistance at $300 and a lot of the political negativity is already prices into the market. We already have a November XBI spread but the biotechs are the only ETFs that have any option premiums. I am picking a strike well out of the money, which should be relatively safe if that is possible in this market.

Sell short Nov $250 put, currently $1.30, stop loss $275.00

Buy long Nov $220 put, currently .35, no stop loss.
Net credit 95 cents.


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

The debate must have been seen as positive by traders because the futures shot up to +5.50 immediately after it was over. Support on the S&P is 2,120 and that equates to 212 on the SPY. The market has been up for a couple days as we head into the normally bullish end of October the markets should have a positive bias.

Sell short Nov $205 put, currently $1.01, stop loss $210.50
Buy long Nov $197 put, currently .40, no stop loss.
Net credit 61 cents.

 


XBI - Biotech ETF (December Call Spread)

Clinton is leading and is now assumed to be the winner despite recent gains by Trump. The biotech sector is in serious decline in anticipation of drug price controls if she is elected. With two weeks to go until the election we should see a continued decline in the sector. If she is elected the decline should continue. If Trump pulls out a win the sector should rebound but we can stop out if that happens.

Sell short Dec $67 call, currently .48, stop loss $62.25
Buy long Dec $72 call, currently .14, no stop loss.
Net credit 34 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.