Last Wednesday we were celebrating the Fed decision and the "gradual" guidance with the markets testing new highs.
That euphoria lasted about 12 hours and when the market open on Thursday the trend was down and it is still down unless you are a big cap tech stock. The market crash on Tuesday was blamed on many things but the most likely was the healthcare train wreck in Washington. Without a successful conclusion to the healthcare debacle, the rest of the administrations pro growth proposals including tax reform will slowly wither away and disappear well into the future. This worry tanked the markets on Tuesday.
This is also a weak period after the March option expirations. The three weeks after expiration are used to restructure portfolios for the Q1 earnings cycle that starts the middle of April. It is also used to extract money from the market to pay the 2016 tax bill. Those two events typically keep the market in check with periods of volatility over the next three weeks.
The Dow was the weakest index again on Wednesday with the help of Nike. The stock decline erased 30 points from the Dow but there were other culprits. Goldman was also down again to remove another 15 points from the index.
The Dow is unsupported at this level and could easily test 20,500 or lower. However, if the dip buyers return this dip could be just a distant memory a week from now.
The S&P rebounded slightly from the uptrend support at 2,340 but the 4 point gain was really lackluster since the Nasdaq was 35 points. The prior support at 2,360 could now be resistance so until we are back over that level I would not exhale.
The Nasdaq 100 has not violated the critical support at 5,300 and posted a strong rebound from Tuesday's drop. The big cap tech stocks are alive and well. If the $NDX continues to move higher the rest of the market will have a tough time moving lower.
The small cap indexes erased their gains from late last week and the S&P-600 closed at a four month low. This is going to be a strong negative for the market if they continue lower. I looked at more than 300 small cap stock charts today and only about 10 had bullish charts. Almost all were headed south.
The futures are up 6 points late Wednesday evening but that can change in the blink of an eye on a headline. The healthcare bill is due to be voted on in the House and last I heard there were more than enough votes to sink it. That suggests the leadership will pull the bill and send it back to committee rather than actually suffer a defeat. That could be negative for the markets because it would push the tax reform farther into the future.
We are at that pivot point where we have to start reaching out to May to get any premiums and with the potential for some high volatility between now and then, that could be very risky. Also, the Q1 earnings cycle begins in mid April so we will have to start dodging those bullets again as well.
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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.
March Position Recap
We escaped the March option cycle with a very small loss despite the volatility. The market shot up to a new high on March 1st and then declined from the 1st to the 14th. We did not launch a lot of new positions because of the earnings cycle negating many of the potential candidates and the individual stock volatility removing a lot of other potential candidates. With the market rising into the March 1st high the volatility hit a 3-year low and premiums were almost nonexistent.
Current Position Changes
PII - Polaris Industries (Stopped Short Side)
Polaris plunged $5 in Tuesday's market crash and stopped us out on the remaining short put. We still have a long April $70 put but it is well out of the money. I debated on closing it today for the 25 cent premium or letting it ride for another week. If PII breaks support at that $83 level, it could retest $80 and we could close the put next week. However, that is another week of premium deflation unless PII was todecline sharply. Because the stock did not rebound today, I elected to retain it.
Closed Apr $75 short put, entry .85, exit .45, +.40 gain.
Retain Apr $70 long put, entry .60, currently .25. No stop loss.
SWKS - Skyworks Solutions (Stopped Short Side)
Skyworks was another casualty of the Tuesday market crash and our short put was stopped out. We have a long April $80 put but unless lightning strikes it will expire worthless.
I considered reshorting the Apr $90 put but the bid/ask spread is 40 cents .60/.100. If we were stopped again it would be a loss for sure. That is available if a reader wants to take the chance in this market with SWKS at $97.
Closed Apr $90 short put, entry $1.20, exit .90, +.30 gain.
Retain Apr $80 long put, entry .32, currently zero.
WDC - Western Digital (Stopped Short Put)
Western Digital was another casualty of the Tuesday market crash. We were stopped at $74.25 on the short $72.50 put. This was the second strike on selling a short put on WDC. Call me crazy but I am going to try it again. The intraday dip at the open this morning hit $71.38 and then rebounded to $75. That should have cleared any sell stops today. It also inflated the premiums to give us another chance.
Closed Apr $72.50 short put, entry $1.27, exit $1.80, -.53 loss.
Sell short Apr $70 put, currently $1.01, stop loss $72.85.
PANW - Palo Alto Networks (Stopped Short Side)
Palo Alto was another casualty of the Tuesday market crash. The stock broke month long support to stop us out at $113.85. The long put is still open and actually has a good chance of increasing in value.
Closed Apr $110 short put, entry $1.30, exit $2.00, -.70 loss.
Retain Apr $100 long put, entry .26, currently .25, no stop loss.
AMD - Advanced Micro Devices (Expired Covered Call)
AMD closed on Friday at $13.49 and we had sold a $14 call. That call expired worthless and we need to resell an April call. Shares ar moving slowly higher and you have the option of selling the April $14 call for 97 cents with AMD at $14.10 or selling the $15 call for 58 cents and hoping to get an additional 90 cents of stock appreciation over the next three weeks. I am recommending the $14 call because the higher premium provides a little more insurance against a dip. Support is $13.
Expired Mar $14 call, entry .90, expired, +.90 gain.
Sell short Apr $14 call, currently .97, stop loss $12.85.
ACOR - Acordia Therapeutics (Stopped Covered Call)
The Tuesday market crash also knocked us out of the Acordia covered call for a breakeven.
Closed ACOR shares, entry $28.30, exit $25.85, -$2.45 loss.
Closed Apr $28 call, entry $5.04, exit $2.70, +2.34 gain.
Net loss 11 cents.
ITCI - Intra cellular (Stopped Covered Call)
The Tuesday market crash also knocked us out of the ITCI covered call.
Closed ITCI shares, entry $15.40, exit $13.85, -1.55 loss.
Closed Apr $17.50 call, entry $1.00, exit .80, +.20 gain.
Net loss $1.35.
NFLX - Netflix (Put Spread)
I am going to have to start calling this the weekly Netflix spread. They simply have the best premiums well out of the money and I am going to continue to take advantage of it.
Earnings April 19th.
sell short Apr $130 put, currently $2.18, stop loss $136.45
Buy long Apr $120 put, currently .83, no stop loss.
Net credit $1.35.
TSLA - Tesla Inc (Put Spread)
Shares of Tesla rallied last week on the Autocar article on the Model Y and then faded somewhat in the market crash on Tuesday. Since the company is doing a secondary for far less than investors expected, the stock is not likely to decline below support.
Sell short Apr $230 put, currently $2.00, stop loss $239.50
Buy long Apr $215, currently .77, no stop loss.
Net credit $1.23.
Other Potential Plays (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.
April expiration is the 21st.
New Covered Call Recommendations
No Covered Calls
The market crash and the choppy trading in the small cap stocks has killed all the charts and the premiums. The small cap indexes hit new lows this week and that caused selling in all the hot stocks that would normally have had decent premiums.
Existing 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.
ACOR - Acordia Therapeutics (Covered Call)
Acordia is surging higher despite the volatility in the biotech sector. The stock closed at at 10-month high on Wednesday in a weak market. Volatility in the options suggest there may be something going on behind the scenes. They could be ripe for an acquisition.
Earnings May 16th.
Buy write ACOR April $28 call, currently $4.10, stop loss $24.35
AMD - Advanced Micro Devices
AMD was left for dead multiple times over the last several years. They have reinvented themselves and are becoming an actual competitor for Intel and Nvidia. They beat on earnings and have several new products in the delivery stream.
Earnings May 2nd.
Buy-write Mar $14 call, currently $13.56 and $.80, stop loss $11.85
Gain if called $1.24
BA - Boeing (Call Spread)
Boeing has been a star performer since October. They are up over $50 in that period with a $20 spike since the beginning of February. They appear to be topping out and the Dow is weakening. With the Fed meeting, debt ceiling and the tax cut proposal moving farther into the future every day, the Dow is likely to continue to weaken. Those stocks that led the charge higher are going to give back some of those gains.
Earnings April 26th.
Sell short April $190 call, currently $1.41, stop loss $185.85
Buy long April $200 call, currently .27, no stop loss.
Net credit $1.14
CYNO - Cynosure (Cash secured put)
CYNO beat on earnings on Tuesday on record revenue that rose 19%. Shares are moving higher after the report. With support at $49 I am recommending a $45 short put.
Earnings May 9th.
Sell short Mar $45 put, currently $1.70, stop loss $48.85.
CYTR - CytRx Corp (Covered Call)
It was going to be very hard to lose money on this position.
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.
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.
DLTR - Dollar Tree (Put Spread)
Dollar Tree is choping around between $75-$80 and the $72.50 put strike has some decent value. DLTR has not touched $72.50 since Nov 2015. I am going to use a wide stop on this that will be pretty close to the strike just to avoid the choppiness.
Earnings May 17th.
Sell short April $72.50 put, currently $1.70, initial stop loss $73.50
Buy long April $60 put, currently 35 cents. No stop loss.
Net credit $1.35.
GS - Goldman Sachs (Put Spread)
Goldman was the market leader in November with an unbelievable surge. Shares were flat for five weeks in Dec/Jan before crashing back -$16 over a three day period. A bottom formed at $230 and shares are moving higher again. There is strong resistance at $246 but as long as the market continues to make new highs, Goldman should be making new highs as well.
Earnings Apr 19th.
Sell short Mar $220 put, currently $1.94, stop loss $229
Buy long Mar $200 put, currently .48, no stop loss.
Net credit $1.46
Update 2/8/17: Goldman gapped down last Thursday to stop us out of the short put. I am recommending we reopen the same strike.
Closed Mar $220 short put, entry $2.46, exit $3.70, -1.24 loss.
Sell short Mar $220 put, currently $1.50, stop loss $229.25
Retain Mar $200 long put, entry .50, currently .30.
INCY - Incyte Corp (Put Spread)
Incyte has a great pattern of gaps higher after earnings and no material retracements after the last two events. Shares spiked from $120 to $130 after earnings in late February and are close to a new high on Wednesday. There are no signs of sellers in this stock.
Earnings May 16th.
Sell short April $125 put, currently $2.40, stop loss $131.50
Buy long April $115 put, currently .90, no stop loss.
Net credit $1.50.
ITCI - Intra Cellular Therapies (Covered Call)
Shares were very volatile with earnings on March 1st but have shaken off that volatility and are moving nicely higher. I picked ITCI because of the nice trend. The call is well out of the money but the trend id likely to continue and we can pocket some gains from the rise in the stock price.
Earnings June 1st.
Buy write ITCI April $17.50 call, currently $15.42 and $1, stop loss $13.85.
Gain if called $3.08.
IWM - Russell ETF (Call Spread)
The Russell 2000 has been the weakest index and it is threatening to break below support at 1,350. I have looked at hundreds of small cap charts and the vast majority are very bearish. The index is only being kept alive by a small number of stocks, mostly in the biotech sector.
The S&P futures are down -8.50 as I type this so the odds are good we are headed for some real profit taking. I am recommending a call spread since we may not be back in this area with a bullish bias for several weeks.
Sell short Mar $140 call, currently $1.08, stop loss $137.65
Buy long Mar $145 call, currently .27, no stop loss.
Net credit 81 cents.
MELI - Mercadolibre (Short Put)
MELI is the largest online retailer in Latin America and they closed at a four-week high on Wednesday. They were recently upgraded by Goldman to buy with a $170 price target. Holiday shopping was probably good for MELI.
Earnings Feb 23rd.
Sell short Feb $150 put, currently $2.00, stop loss $155.50
NFLX - Netflix (Put Spread)
Netflix has broken out to a new high at $145 and showing no signs of weakness. There is solid support at $140 and I think we can squeeze in a 135/125 put spread.
Earnings April 19th
Sell short Mar $135 put, currently $1.47, stop loss $138.85
Buy long Mar $125 put, currently .40, no stop loss
Net credit $1.07.
NFLX - Netflix Inc (Put Spread)
I hate to keep going back to the same stocks but Netflix consistently has some of the highest option premiums and a relatively stable trend. While we cannot predict the future, I think Netflix has more upside than downside in the weeks ahead.
Earnings April 19th.
Sell short April $130 put, currently $2.60, stop loss $138.35
Buy long April $115 put, currently .57, no stop loss.
Net credit $2.03.
NFLX - Netflix (Put Spread)
I hate to keep going back to Netflix for a play nearly every week but they have a trend and great option premiums. The only negative about Netflix is that the premiums do not decline until the last couple weeks of the cycle. They do not decay much until they get close to expiration. This strike is well out of the money and hopefully we will not get stopped. One reason the premium does not decline is that earnings are 3 days before expiration. We will need to exit this position early.
Earnings April 18th.
Sell short April $135 put, currently $2.45, stop loss $139.75
Buy long April $120 put, currently .55, no stop loss.
Net credit $1.90.
NLNK - Newlink Genetics (Covered Call)
NLNK beat the street on earnings and revenue with a strong report. On Wednesday they announced two abstracts on new drugs will be presented on April 4th at the AACR conference in Washington. These will more than likely be positive for the company.
Earnings May 30th.
Buy-write Apr $17 call, currently $16.78-$2.05, stop loss $13.85.
Gain if called $2.17
NVDA - Nvidia (Cash secured put)
Nvidia blew away earnings but investors thought guidance was light even though they are the bleeding edge of technology today with new product announcements every week. Shares have pulled back to $109 and they could decline to $100 in a weak market. However, that should be strong support.
Earnings May 9th.
Sell short April $95 put, currently $1.50, stop loss $99.50
PANW - Palo Alto Networks (Put Spread)
Palo Alto posted better than expected earnings but revenue of $422 million missed estimates for $430 million on "execution issues." That was not explained and the stock was crushed. Shares found support at $115 and have been moving sideways for over two weeks. It is time for the shares to begin ticking higher. After this long, it is doubtful that they will move significantly lower. They have had plenty of time and $115 was solid support.
Earnings May 30th.
Sell short April $110 put, currently $1.50, stop loss $113.85.
Buy long April $100 put, currently .45, no stop loss.
Net credit $1.05.
PII - Polaris Industries (Put Spread)
Polaris has a choppy uptrend with resistance at $90 but it has not touched support at $80 since December. The choppy chart is why the premiums are higher than normal.
Earnings April 25th.
Sell short April $80 put, currently $1.50, stop loss $83.85
Buy long April $70 put, currently .50, no stop loss.
Net credit $1.00.
Update 3/8/17: Polaris crashed with the market at the open on Monday to stop us out at $84.65 on the short side of our spread. I am recommending we reload it with a lower put. The $80 put is too close to the stock price and the market is weakening. It may only be temporary but we should be cautious.
Closed Apr $80 short put, entry $1.65, exit $2.50, -.85 loss.
RELOAD: Sell short Apr $75 put, currently 70 cents, stop loss $83.50
Retain Apr $70 long put, entry .65, currently .35.
PXD - Pioneer Natural Resources (Call Spread)
Crude oil fell 5% on Wednesday to $50 and the lowest level in 2017. Energy stocks were crushed with PXD losing nearly $10. For various reasons oil is not likely to rebound strongly and energy equities are even less likely to rebound suddenly.
Earnings May 9th.
Sell short April $200 call, currently $1.95, stop loss $192.50
Buy long April 215 call, currently 65 cents, no stop loss.
Net credit $1.30.
STZ - Constellation Brands (Put Spread)
Shares of Constellation have been volatile over the last four months. The stock has been bouncing in the $145-$158 range. However, I think this may be over as talk about a border tax is starting to fade and chances of passage are decreasing. Shares closed at a six-week high on Wednesday after a solid rally from the last low.
Earnings April 5th.
Sell short Mar $150 put, currently $1.65, stop loss $153.00
Buy long Mar 140 put, currently .55, no stop loss.
Net credit $1.10.
SWKS - Skyworks Solutions (Put Spread)
Skyworks closed at a new high as speculation over the iPhone 8 continues to lift all the component suppliers. Skyworks also benefits from phones being manufactured by other companies besides Apple. They are in the sweet spot of mobile technology.
Earnings April 20th.
Sell short Apr $90 put, currently $1.50, stop loss $93.50
Buy long Apr $80 put, currently .30, no stop loss.
Net credit $1.20.
SWKS - Skyworks Solutions (Closed Short Put)
We were stopped out of the short side with SWKS crashed with the Nasdaq on Monday at the open. I am recommending we reload with the same strike. The stock is moving up again and closed near its highs.
Closed Apr $90 short put, entry $1.82, exit $1.85, -.03 loss.
RELOAD: Sell short Apr $90 short put, currently $1.10, stop loss $93.50
Retain Apr $80 long put, entry .32, currently .15.
URI - United Rentals (Put Spread)
URI has been a post election favorite and the stock broke out of a month long consolidation to close at a new high on Wednesday.
Earnings April 26th.
Sell short Apr $120 put, currently $2.50, stop loss $125.85
Buy long Apr $105 put, currently .95, no stop loss.
Net credit $1.55.
Update 3/8/17: Somebody wanted out of URI in a hurry. After gapping up more than $1 to $130 at the open today the stock rolled over and fell to a 2-week low at $124. We were stopped out at $125.85. There was absolutely no news and that makes me nervous about trying to reload the position.
This could be a sign the broader market is about to decline. Several stocks that had been winners suddenly headed south on Wednesday. We will keep the long put and see if the direction stabilizes by next week.
Closed Apr $120 short put, entry $2.97, exit $4.10, -1.13 loss.
Retain Apr $105 long put, entry .74, currently $1.00.
VIX - Volatility Index (Call Spread)
The VIX has been slightly elevated over the last several days to close near 12 today. If we were to get a major downdraft, I would like to capture that by selling a call spread. We are going to enter the spread with a VIX trade at $18. There will be no stop loss because it rarely stays high for more than a couple days.
With a VIX trade at $18,
Sell short Mar $20 call, estimated premium $2.00, no stop loss.
Buy long Mar $30 call, estimated premium 40 cents, no stop loss.
Estimated net credit $1.80
Update 2/8/17: The market refuses to decline and the VIX refuses to rise. Both of those facts will eventually reverse. I profiled a March call spread in the VIX in the prior newsletter. With time expiring quickly, I am revising that to use April strikes.
With a VIX trade at $18
Sell short Apr $20 call, estimated premium $3.00, no stop loss.
Buy long Apr $30 call, estimated premium 50 cents, no stop loss.
Update 3/8/17: We have a speculative call spread on the VIX to be executed on a spike to $18. Since I added that potential position several weeks have passed and the April strikes were sneaking up on us. I modified the recommendation to use the May strikes if/when the VIX spikes to $18.
With a VIX trade at $18
Sell short May $20 call, estimated $3.00, no stop loss.
Buy long May $30 call, estimated 50 cents, no stop loss.
WDC - Western Digital (Cash Secured Put)
WDC posted good earnings and spiked to more than $80 but then saw a four-week decline. After hitting a low of $73 on the 24th, they announced a new storage 256gb storage chip for the iPhone and iPad and shares took off rising $5 over three days.
Earnings April 26th.
Sell short Apr $70 put, currently $1.01. Stop loss $74.25.
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.