Last Wednesday was a wild day followed by a week of gains. Today was a mixed market that could be followed by a week of consolidation.

If we could predict the day to day market with any accuracy on a daily basis we would all be retired on our own island. Unfortunately, no matter how long a person has been trading and following the market, it still surprises more often than not and moves the opposite of what we expect.

In theory, the Trump rally should be running out of steam and profit taking should appear soon. I am not expecting a 5% correction but we could have several days of consolidation where the various sectors and indexes move erratically.

When Reagan was elected in 1980, the market rallied for a month. After the honeymoon period was over, we saw a period of choppy markets followed by a 20% decline. I am sure Trump will inherit a recession in the years ahead simply because the business cycle has run its course. We are in the 7th year of an expansion and the third longest since the Great Depression.

For our purposes in this newsletter, we really do not care which direction the market goes as long as it maintains that direction for more than a few days. The charts today all look similar to this chart of Goldman Sachs. The bank rallied 20% over 6 days and now nobody knows what to do. If you just woke up from a coma and somebody showed you this chart, your immediate reaction would be to sell it.


Unfortunately the Dow chart looks exactly the same. It is very overbought and I would be very surprised if there was not a material dip in our future. The short covering and price chasing has run its course and now the calmer minds will take over.


I heard a trader today say, "Why is it that every time we have a major market move, everybody immediately begins to forecast its death?" The answer of course is that normally the market moves in bullish and bearish cycles that last days or weeks and then repeat even when there is an overall market bias.

When a paradigm shift actually occurs and the market begins a 2-3 month directional move everybody tries to short it because they are used to the short term cycles. I can remember markets that rallied for months and months and everybody was constantly predicting their doom.

I do not want to be that guy but you have to admit the charts paint a scary picture. If we could get a week of minor declines and then a set of new highs, I think everyone would climb onboard but right now, the skeptics are in control.

Jim Brown

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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


NFLX - Netflix (Short Closed)

Last week I recommended we close the short side of the position because there was nothing to be gained by leaving that risk open. On Thursday morning NFLX gapped higher at the open with a 13 cent cost to cover at $123 and then shares imploded to trade at $111 two days later. In retrospect our call would have been perfectly fine and would have expired but for 13 cents we avoided any unknown risk.

Closed Nov $135 short call, entry $1.56, exit .13, +1.43 gain.
Expiring Nov $145 long call, entry .50, currently zero, -.50 loss.
Net gain .93.



PXD - Pioneer Natural Resources (Short Closed)

We were stopped out of the short side on this put spread when PXD crashed $13 from the Thursday high at $181.50 to the $168.79 low on Friday. That was a $13 drop caused by a sharp drop in oil prices to trade at $42.20 and a three-month low. The speed of the drop rapidly inflated the premiums and we lost $2 on the exit.

I am recommending we reload the Dec $165 short put, currently $2.55.

Closed Dec $165 short put, entry $2.92, exit $5.00, -2.08 loss

Sell short Dec $165 put, currently $2.55, stop loss $171.50.



Monthly Cash Machine Play Updates


No Changes


New Option Writer Recommendations


LLY - Eli Lilly & Co (December Put Spread)

Lilly spiked on the election results and has faded slightly as the sector cools. Because of the spike we can sell a put under the prior low and we should be relatively safe.

Earnings Jan 25th.

Sell short Dec $70 put, currently $1.40, stop loss $74.50
Buy long Dec $60 put, currently .40, no stop loss.
Net credit $1.00.



ACIA - Acacia Communications (December Put Spread)

ACIA has had a rough couple of months. Things are finally improving and the shares hit a 3 week high intraday on Wednesday.

Earnings Feb 9th.

Sell short Dec $60 put, currently $1.20, stop loss $64.85
Buy long Dec $50 put, currently .70, no stop loss.
Net credit .70



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


No Covered Calls


New Monthly Cash Machine Recommendations


QQQ - Nasdaq 100 ETF (December Put Spread)

The Nasdaq 100 has been the weakest index for the prior week as portfolio managers dumped big cap tech stocks to raise money for banks and industrial stocks. The NDX is starting to rise again and had the biggest gain of all the indexes today. I expect the NDX to continue to outperform as the other indexes face some profit taking.

Sell short Dec $110 put, currently .56, stop loss $113.85
Buy long Dec $103 put, currently .16, no stop loss.
Net credit 40 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.


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


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


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.


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.


SPY - S&P-500 ETF (December 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.

 


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.