Starting today with the May recommendations I am taking over the Cash Machine newsletter. Steven has been producing recommendations for the Cash Machine for 10 years and for Drip Advisor for two years before that. I am really going to miss him and his positive outlook on life. Thank you again Steven for your years of faithful service!
I am going to make a few changes to the Cash Machine format. I am doing away with the Watch List and we will have stop losses on the individual legs in the plays. The stops will only be for the short sides. If we are stopped on the short side to limit losses it means the underlying stock has reversed direction and could continue in that direction for some time. If that is the case then our long option can potentially rise in value and offset any losses we had on the short side. In some cases the long side can become even more profitable than the original spread position.
I am going to recommend plays that are less volatile than the spread plays in Option Writer. The concept for the Cash Machine was to launch low volatility plays that produce a small amount of premium and repeat the process every month. This is not supposed to be a get rich quick newsletter. The ideal product will produce about 8-10 successful positions a month.
The portfolio graphic will show the single contract results and the results for 10 contracts. If you want to do more contracts that is of course up to you. I strongly suggest that individual positions be limited in order to benefit from diversification. I will try to pick stocks across all sectors so that a plunge in one sector does not severely impact the portfolio significantly.
I am going to pick plays based on fundamentals, trends and headlines rather than a hardwired scan for volatility or for specific option premiums. For instance if a company reports earnings and warns for the next quarter and the stock begins to trend lower then they would be a good candidate for a bear call spread. Conversely if the earnings were positive and the stock began to trend higher they would be a good candidate for a put spread.
The merger activity in the biotech sector should also provide us with some decent plays in the future. When there are multiple companies trying to acquire each other the prices have a built in support and should produce some good put spreads.
The regular publication of the Cash Machine will be on Wednesday night. However, if a choice opportunity arises I will send out a special update. Because we are moving to a stop loss format instead of the Watch List there is no need for daily updates. If there is a material change in a stock I will update that when it occurs.
I would encourage everyone to EMAIL ME with your likes and dislikes of the new format. What would you like to see and what would you like changed. The object writing premium is to make money on expiring options from low volatility positions. Unfortunately we have to accept some volatility in order for there to be any premium.
Because of the earnings cycle there are very few stocks that don't have earnings over the next three weeks. Once we get into the June expirations there should be quite a few more opportunities.
Send Jim an email
Current Position Changes
$OVX - Oil Volatility index (Bear Call Spread)
Crude oil is finally in a rising trend. WTI has rebounded from $43.23 in mid March to $56.20 tonight. It is not that oil production has suddenly declined or inventory levels are receding but investors are speculating on those events occurring in the near future.
In May the refiners kick into high gear to produce gasoline for the summer driving season. Once spring maintenance is over and that should be this week the frantic rush will begin to push summer blend fuels into the distribution system to replace the winter blends we have been using. Starting May 1st through July 4th the refiners will run as close to 100% capacity as possible. This should begin drawing down the inventory levels and that will further induce investors to speculate on rising oil prices.
The Oil Volatility Index peaked at record highs in February and has begun collapsing as normal price trends return. A sudden return to sharply lower prices on oil could reverse this trend but with demand patterns rising as summer approaches I don't expect that to happen. We will retain a stop loss on the short side just in case.
Sell short OVX, May $45 Call, currently .70, stop loss $43.25
Buy long OVX, May $50 Call, currently .25, no stop.
Net credit 45 cents.
RCL - Royal Caribbean (Bear Call Spread)
On Monday Royal Caribbean posted earnings of 20 cents compared to estimates for 13 cents and well above their prior forecast of 10-15 cents. Shares declined -$6 on the news. The rest of the story was an earnings warning for the rest of the year. Management from $4.65-$4.85 to $4.45-$4.65 compared to the analyst estimates for $4.73. This represents a 20 cent decline in midpoint guidance. Since they beat estimates by 8 cents in Q1 this actually means they are expecting a 28 cent decline in earnings for the rest of the year.
The company said they were seeing an impact from the strong dollar and fuel costs were already rising. They see this combination as a 36 cent hit to earnings for the rest of the year. This was about twice what analysts had been expecting.
The company also said they were seeing somewhat lower revenue trends in onboard purchases from overseas travelers due to the impact of the strong dollar.
RCL shares dropped below prior support to a five-month low. From this point we should see a further deterioration in the share price as investors reevaluate their portfolios as we move into the "sell in May" cycle.
I am recommending the $77.5/80 spread but you can add about a dime to the value if you go out to the 77.5/82.5 spread. I would just rather not take on that extra risk in the first week of the new newsletter format.
Sell short May $77.50 call, currently .47, stop loss $74.85
Buy long May $80.00 call, currently .25, no stop.
Net credit .22 cents.
GDX - Gold Miners ETF (Bear Call Spread)
The health of the gold miners is directly related to the strength in the dollar. With China, Japan and Europe all pouring stimulus on the fire and the Fed talking up interest rates with their potential hike in June the dollar is not likely to decline in the near future.
The GDX has resistance at $20 I am going to recommend a tight spread just over that $20 level.
Sell short May $20.50 call, currently .25, stop loss $20.15
Buy long May $23.00 call, currently .04, no stop.
Net credit .21 cents.
JKS - JinkoSolar (Bull Put Spread)
JinkoSolar is a Chinese manufacturer of solar products that are marked in China and around the world. JinkoSolar is expanding rapidly and hardly a day goes by that they don't announce some new milestone or major contract. Goldman recently published a note saying Chinese demand for solar product was rising. Goldman cited several suppliers as having better volume trends in Q1 with orders rising in recent weeks. Goldman believes Chinese demand will hit 15 gigawatts in 2015. That is less than the 18 GW target but still higher than the 10 GW in 2014. That is a 50% increase in output.
The rising solar demand has boosted most of the solar stocks. The Solar ETF (TAN) has risen from $32 to $49 since January.
JKS dipped last week with the market and was back testing its highs on Wednesday. I expect it to continue to move higher, market permitting.
Sell short May $27 put, currently .60, stop loss $28.25
Buy long May $25 put, currently .35, no stop.
Net credit .25
GBX - Greenbrier Companies (Bull Put Spread)
Greenbrier designs, manufacturers and markets railroad freight car equipment including freight cars for coal and tank cars for oil and other liquids. With the recent flurry of railroad mishaps that resulted in fires from tank cars derailing and rupturing the company has introduced the "tank car of the future" with significantly enhanced safety options. The CEO said last week they may discontinue manufacturing the current "standard" that is approved by the Dept of Transportation. He said the industry normally does not stop building the current "approved" versions but Greenbrier might remove them from the line because of strong demand for their much safer model.
The new cars have 9/16 inch steel walls compared to the 7/16 inch in the federally approved versions. Safety experts are urging the government to drop the 7/16 in versions and force everyone to buy the new cars. This means the tens of thousands of older versions would have to be upgraded. Analysts said it would take 3-5 years but easily doable. Greenbrier believes customers would simply sell their old cars and buy the newer versions. Sales of the new versions are already strong.
Either way this is good news for Greenbrier. Even in a weak oil market the stock has returned to six month highs on rising demand.
Sell short May $60 put, currently .75, stop loss $61.85
Buy long May $55 put, currently .25, no stop.
Net credit .50
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.