The seasonally bullish December period has not started well. The volatility has been extreme and Christmas cheer is sorely lacking. Let's put Santa's picture on some milk cartons and see if we can get something started.
Historically the middle of December has a dip from tax loss selling. Apparently, investors were eager to get the process started and the dip started early. At least that is what analysts are blaming for the decline.
The Dow set a new four-week low today at 17,403 and the S&P did the same at 2,036. The Nasdaq was out of character and also slid to a new low at 5,000 after threatening to break over recent resistance highs at 5,160 just five days ago. This is not a good sign.
Volume of 7.98 billion shares was the highest since October 28th. Declines were 2:1 over advancers and new 52-week lows are roughly three times what they were just last week.
The market seems to be telling us it is tired. Investors are tired of going up and down in the same range all year and then suddenly giving back all the meager gains in a four-day drop in August. When the market rebounded to the July levels, it looked like a good time to exit ahead of the Fed meeting.
At this point, the chances for the traditional rally over the last two weeks of December are looking kind of slim. I could be completely wrong but the lower highs and lower lows on the major indexes are not painting a bullish picture. When the opening short squeeze this morning was sold almost instantly that tarnished the outlook for the rest of the week.
The new market lows over the last week knocked us out of several positions ahead of the December options expiration next week. I did add a couple of January plays today but there is no harm in waiting patiently on the sidelines for some market direction, other than down, to eventually appear.
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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.
YUM - Yum Brands (Closed)
The long call on YUM declined to our stop loss on Thursday. We are now out of the YUM position.
Closed Dec $77.50 long call, entry .31, exit .89, +.58 gain.
Previously stopped Dec $72.50 call, entry $1.00, exit $1.70, -.70 loss
Net loss 12 cents.
LRCX - Lam Research (Stopped)
The short put on LRCX declined to our stop loss on Thursday at $76.45. We exited with a small gain.
Closed Dec $72.50 put, entry $1.10, exit .70, +.40 gain
Retain Dec $62.50 long put until expiration.
WTW - Weight Watchers (Stopped)
The short put on WTW declined to our stop loss on Tuesday at $24.45. We exited for a breakeven.
Closed Dec $22 short put, entry .76, exit .75, +.01 gain.
Retain Dec $19 long put, entry .36, currently .10.
BLUE - Bluebird Bio (Stopped/Close)
Disaster struck on Bluebird on Monday. They released some clinical trial results that were lower than expected. Shares declined -$30 on Monday. Fortunately our long put is now worth more than our short put that was previously stopped out on market volatility.
I am recommending we close the long put at the open on Thursday.
Close Jan $65 long put, entry .95, currently $4.60, +3.65 gain.
Previously closed Jan $75 short put, entry $1.80, exit $3.90, -2.10 loss
Net gain $1.65
CME - Chicago Mercantile (Stopped)
CME shares dropped more than $5 in today's volatile trading on no news. We were stopped out of the short put at $95.25.
Closed Jan $92.50 short put, entry $1.43, exit $2.23, -.80 loss.
Retain Jan $85 long put.
FIT - FitBit (Put Spread)
Fitbit has been almost impervious to the market weakness until today. The stock benefitted from two positive articles in Barrons last week and rallied to a four week high. Today's dip inflated the put premiums. I am recommending the Jan $26 short put and that would be a new historic low if the stock actually declined to that level. We saw good support just above that level in late November.
Earnings Jan 28th.
Sell short Jan $26 put, currently $1.10, stop loss $27.75
Buy long Jan $22 put, currently .60, no stop loss.
Net credit 50 cents.
WYNN - Wynn Resorts (Put Spread)
Steven Wynn surprised everyone by purchasing over 1.0 million shares of WYNN stock over the last week according to an SEC filing. This gives him control of more than 11.07 million shares. Steve has always been a buyer on the dips. He knows what his franchise is worth and when the shares are cheap he steps in. When they are expensive he sells a few.
This purchase cost him about $62 million. That is a huge vote of confidence that suggests shares are not going lower. The bad news in Macau cannot get much worse and it is about time for some good news.
Earnings are Feb 3rd.
Sell short Jan $55 put, currently .95, stop loss $58.85
Buy long Jan $45 put, currently .45, no stop loss.
Net credit 50 cents.
Original Play Recommendations (Alpha by Symbol)
BLUE - Bluebird Bio (Put Spread)
Bluebird is in the business of solving blood diseases. A new drug called BB305 in the testing stages cures a rare disease called beta-thalassemia in the majority of patients. Prior to this drug these patients had to receive routine blood transfusions, which are not only expensive but dangerous.
At the ASH conference in early November, they released results that showed most patients were successful but three patients had a doubly rare form of the same disease and the drug did not work for them. The stock crashed even though these patients with the extremely rare form of this disease are a very minor subset of the patient population. The vast majority of people with this disease will benefit significantly from the treatment. The FDA has labeled it a "breakthrough therapy." It also has an application in sickle cell disease.
Shares are recovering from the crash and should continue higher in a decent market.
Earnings are Feb 24th.
Sell short Dec $70 put, currently $2.55, stop loss $78.65
Buy long Dec $60 put, $1.10, no stop
Net credit $1.45
CME - Chicago Mercantile Exchange (Put Spread)
Chicago Mercantile is the U.S. futures exchange and they are doing a thriving business with the directional moves in the commodity sector. With today's close at $98.25 they are within $2 of a new closing high.
Earnings Feb 4th.
Sell Jan $92.50 put, currently $1.45, stop loss $95.25
Buy long Jan $85 put, currently .55, no stop loss
Net credit 90 cents.
LRCX - Lam Research (Put Spread)
Lam has been a steady stock and the only position in the November cycle that did exactly as it was supposed to do. It went sideways with an upside bias. The stock broke out to a four month high on Wednesday and could be poised to move over $80. Let us hope it stays steady with an upside bias for another month.
Earnings Jan 27th.
Sell short Dec $72.50 put, currently $1.10, stop loss $74.85
Buy long Dec $62.50 put, currently .25, no stop.
Net credit 85 cents.
NFLX - Netflix (Put Spread)
Netflix is on fire. After dropping to $101 last Friday it has rebounded more than $17 in three days and closed at a three-month high. I seriously doubt it is going to return to $100 in the next four weeks.
Earnings Jan 13th.
Sell short Dec $102.86 put, currently $1.23, stop loss $109.65
Buy long Dec $93.57 put, currently .53, no stop loss
Net credit 70 cents
SWKS - Skyworks Solutions (Call Spread)
Skyworks is an Apple supplier and analysts are cutting estimates on component demand almost daily. On Tuesday Credit Suisse said Apple cut production of iPhone component last week by 10% because of weak Asian demand for iPhones.
Skyworks is also in a bidding war with Microsemi over PMCS-Sierra (PMCS). We learned on Tuesday that PMCS was favoring the bid by Microsemi and analysts expect Skyworks to up the bid again.
Earnings Jan 21st.
Sell short Dec $85 call, currently $1.60, stop loss $82.65
Buy long Dec $95 call, currently .35, no stop loss.
Net credit $1.25.
SWKS - Skyworks Solutions (Put Spread)
Skyworks is in rally mode after another Apple supplier Avago (AVGO) reported full year earnings that spiked 83% last week. Investors were afraid that Apple was cutting orders for iPhone components and apparently Avago had not seen those cuts. Q3 revenue rose +16% and earnings +26%. This boosted all the Apple component suppliers including Skyworks.
Earnings are Jan 21st.
Sell short Jan $75 put, currently $1.35, stop loss $79.25
Buy long Jan $65 put, currently .40, no stop.
Net credit 95 cents.
WDC - Western Digital (Put Spread)
Western Digital shares fell hard after it announced it was buying/merging with Sandisk (SNDK). As a tech guy I understand the reasoning behind the acquisition. Having Sandisk memory in Western Digital drives will make them run faster. However, analysts thought WD paid too much and the stock tanked.
It appears to have found a bottom at $60 and there are some rumors that the deal may not happen. If that was the case WDC shares would rocket higher. At this point the deal is priced in and shares are risng anyway so it looks like the worst is over.
Earnings Jan 26th.
Sell short Dec $60 put, currently $1.01, stop loss $61.25
Buy long Dec $55 put, currently .36, no stop loss
Net credit 65 cents.
WTW - Weight Watchers (Put Spread)
WTW soared a couple weeks ago when the company announced Oprah Winfrey had taken a 10% stake in the company and would put her weight behind the product. Everyone knows the Oprah effect is legendary. Whatever she backs always explodes as millions of fans follow her lead. Shares are not showing any post headline decline and it appears the rally may stick.
Earnings Feb 4th.
Sell short Dec $22 put, currently .80, stop loss $23.05
Buy long Dec $19 put, currently .40, no stop
Net credit 40 cents.
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.
YUM - YUM Brands (Call Spread)
YUM reported another quarter of disappointing earnings with comps in China coming in well below expectations. In an effort to pacify investors they announced the spinoff of YUM China into a separate company. That is the growth sector for the company. The parent will remain YUM Brands US and will be a stable slow growth stock. Investors are expressing their lack of interest in a slow growth operation by selling their shares.
Earnings Jan 5th.
Sell short Dec $72.50 call, currently $1.10, stop loss $70.25
Buy long Dec $77.50 call, currently .43, no stop loss
Net credit 67 cents.
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