Just because the Dow futures rebounded +1,221 points on Wednesday does not guarantee a bullish market.

The odds are pretty good but there are no guarantees. In prior elections the volatility continued for 2-5 days and 50% of the time the initial direction was not the final direction.

I think this time we have a good chance of breaking out of our recent three-month period of consolidation and actually making new highs. The Q3 earnings were better than expected. The economic data has been decent but not exciting. Payrolls have been ok and the Fed appears to be on track to raise a quarter point in December. This is already factored into the market.

While Trump's victory was unexpected by the majority of investors there is no immediate impact to the market because it will take 6-9 months or even years for any actual policy to be implemented. His tax cuts will be pro business and replacing the unAffordable Care Act will take a lot of pressure of businesses and allow them to begin hiring full time workers once again. I doubt that replacement will happen before late 2017.

The key point is that his policies will not impact the market until the middle of 2017 at the earliest.

The election uncertainty is over and while the result was traumatic for about 8 hours, the market rebounded from the crash and the Dow even set a new intraday high.

The fly in the soup was $1.4 billion in market on close sell orders on the NYSE. There was little impact to the gains for the day but that suggests not everybody is of the same opinion that the market can continue higher.

Looking at the Dow chart is scary. The close right on the old resistance highs after a roughly 700-point gain since Thursday's close at 17,890 is just begging for a couple days of profit taking. However, the Nikkei is up +7% overnight and the Hang Seng +2%. The S&P futures are up +9. If there is going to be a bout of profit taking it will run head first into a lot of apparent buying.


Remember, volatility works both ways. We typically refer to volatility as bearish movement. It also works on bullish movement. Volatility crashes to unsustainable levels and then the bearish movement returns to lift it up again.

I am remaining cautious this week mostly because every chart has a 5% or greater spike over the last three days and is not tradable from a premium sale standpoint.

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


No Changes


Monthly Cash Machine Play Updates


IBB - Ishares Biotech ETF (Stopped)

The rebound in the biotech index caused the IBB to rise and our remaining long put was stopped out on Thursday at $262.85. We recovered 10 cents of our insurance premium on the exit.

Closed Nov $220 long put, entry .25, exit .10, -.15 loss.
Previously closed Nov $250 short put, entry $1.34, exit 2.00, -.66 loss.



SPY - S&P-500 ETF (Stopped)

The rebound in the market knocked us out of the left over long put on the SPY. We had already been stopped on the short side the prior week.

Stopped Nov $197 long put, entry .37, exit .56, +.19 gain
Previously closed Nov $205 short put, entry $1.03, exit $1.44, -.41 loss.



XBI - Biotech ETF (Stopped)

The rebound in the biotech index caused the XBI to rise and stopped us out on the short call. Fortunately, we were stopped out on Tuesday and not at the open on Wednesday. We have a very good chance of a home run on the remaining long call.

Stopped Dec $67 short call, entry .51, exit .60, -.09 loss.
Retain Dec $72 long call, entry .11, currently .51, no stop loss.



New Option Writer Recommendations


PXD - Pioneer Natural Resources (December Put Spread)

Pioneer posted earnings of 13 cents that missed estimates for 17 cents. It was purely low oil prices in Q3 that caused the miss. Revenue fell -47% to $1.186 billion and beat estimates for $1.022 billion. They produced 239,000 Boepd, a 13.3% increase. They are the lowest cost producer in the Permian and my top pick in the energy space. Shares fell $13 on earnings but have nearly regained all of that loss.

Earnings Jan 31st.

Sell short Dec $165 put, currently $2.70, stop loss $168.85
Buy long Dec $145 put, currently $1.25, no stop loss.
Net credit $1.45.



Other Potential Plays (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.

December expiration is the 16th.



New Covered Call Recommendations


CLVS - Clovis Oncology (Covered Call)

Clovis has had some challenges over the last month but the worry over Clinton being elected was the power behind the decline over the last two weeks. Shares rallied 18% on Wednesday. They posted better than expected earnings (loss) last week.

Earnings Feb 2nd.

Buy-write Dec $30 call, currently $32.20-$4.10, stop loss $27.85



New Monthly Cash Machine Recommendations


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

Despite being stopped out of the November spread, I am going to try and take advantage of the current market volatility to launch a new one. The SPY spiked to $216 on Wednesday and the market direction should still be up although we could continue to see some significant volatility. The low last Thursday was $208.38 and I am recommending a $204/$196 spread. Even if we do get more volatility I think the dips will be bought.

I am only adding one position because of that potential for additional volatility.

Sell short Dec $204 put, currently $1.02, stop loss $210.85
Buy long Dec $196 put, currently .50, no stop loss.
Net credit 52 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.


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.


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.


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.