After a sharp drop at the open on the weaker than expected economics from China the markets recovered to end the day flat. That is an accomplishment for a market going through the worst three weeks of the year.

The three weeks following the September option expiration is historically the worst three weeks of the year for the markets. The S&P has only posted gains in five of the last 17 years for the week after expiration. We are halfway through that week and it looks like another losing year.

For the markets to recover from their lows today and end basically flat that is an accomplishment. However, one day does not make a trend. The first two weeks of October are known for market lows. October is called the bear killer month since the last two weeks typically begin the Q4 rally.

We were fortunate in the September cycle and squeezed out a small gain despite some very volatile weeks. Our October cycle is off to a good start and hopefully the next two weeks will be just choppy rather than seriously directional.

The majority of stocks have developed some seriously steep declines and there is more than likely a big short squeeze in our near future. S&P futures have been volatile after the close today. They started out negative and then rose to +5 points but are rapidly returning to the flat line.

I do not have a bias for the rest of the week other than the historical trend.

Jim Brown

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Current Portfolio

Current positions

Items shaded in blue were previously closed.

Current Position Changes

Stop Loss Updates

Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

September Recap

We squeezed out a minor gain in a very volatile month despite big losses in QRVO and YUM. Wynn Resorts is the gift that keeps on giving with a decent gain in September and already another decent gain in October.

QIHU - Qihoo technology (Stopped)

Qihoo found a bottom at $42 and is in a stable uptrend. We are already positive on the remaining long call but we could see shares slow their climb at the resistance at $50. I am recommending we exit with a touch of the $50 level. We are flat on the play as of today and the exit at $50 should give us a minor gain.

Closed Oct $40 Short call, entry $1.00, exit $1.12, -.12 loss
Retain Oct $55 Long call, entry .24, currently .35, +.11 gain. Exit $50.00

New Recommendations

XBI - S&P Biotech ETF (Put Spread)

Biotechs were killed this week when Hillary Clinton said she was going to propose sweeping changes to drug pricing in the USA. This has been tried before and although it is needed, it will be very tough to get through Congress. Every prior effort failed BUT drugs are growing more expensive by the day.

The key here is that we are easily 3-4 years away from any material change. Clinton would first have to be elected and then get legislation passed. I believe the sharp decline in the biotech/pharma space is overdone.

The XBI recently had a 3:1 split and prices are back in range for common investors. There is decent support at $70.

Sell short Oct $67 put, currently $1.15, stop loss $69.35
Buy long Oct $60 put, currently .55, no stop.
Net credit 60 cents.

AET - Aetna (Put Spread)

Aetna is merging with Humana (HUM) and the companies were grilled by senators this week on why the merger would not create anti competitive conditions. Anthem is also merging with Cigna and they were also represented in the inquiry. The companies provided positive answers and because of the Affordable Care Act the post merger prices can be controlled. The stocks did not decline after the senate inquiry. The AET/HUM merger is expected to be approved but that approval will not be until well into 2016. Until then it is still a stock with an upward trajectory. Resistance is $120 and there have not been any serious declines since the August flash crash. The strike I am recommending is $9 OTM and well under support.

Earnings Oct 29th.

Sell short Oct $110 put, currently $1.00, stop loss $115.35
Buy long Oct $105 put, currently .49, no stop.
Net credit 51 cents.

Optional Positions

These were potential plays I did not use today. If you are looking for something else to play you can start here. These are not official recommendations.

Bear Call Spreads

Symbol - Strikes - Credit - Earnings

SOHU - 45/50 - .45 - Nov 2nd
SNDK - 55/60 - .50 - Oct 21st

Existing Play Recommendations

Links to original play recommendation

CAT - Caterpillar (Bear Call Spread)

RRC - Range Resources (Bear Call Spread)

QIHU - Qihoo Technology (Bear Call Spread)

WYNN - Wynn Resorts (Bear Call Spread)

RRC - Range Resources (Reentry Bear Call Spread)

CAT - Caterpillar (Reentry Bear Call Spread)

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.