The market volatility over the last two weeks has been extreme. With the Fed announcement on Wednesday the volatility is probably not over. It is time to change direction.

We were stopped out of all but one play over the last two weeks. As I have said before it is practically impossible to be short options on any stock in this market for any material length of time. The sectors are rotating on a weekly basis. What is up this week is down next week and some other sector takes its place. The next week the entire market is crashing 500 points or surging by the same amount.

The earnings have been less than exciting. A company missing estimates tanks the entire sector. Economics are marginal at best and the headlines from overseas seem to have more impact on our markets than our own reports.

I am planning on changing the focus of this newsletter. I have been too aggressive in trying to capture as much premium as possible. In this market, this has been the wrong strategy.

Starting today, I am only going to focus on ETFs to eliminate as much of the day-to-day volatility in individual stocks as possible. I am no longer going to recommend individual stocks.

I am going to find the options on index and sector ETFs that have the least chance of being anywhere close to the money at expiration. This means we are going to sell strikes well out of the money. My only criteria will be a minimum of 25 cents in premium. The focus will be entirely on not being stopped out. This will mean very low volatility positions and by selling deep out of the money we can hopefully avoid a lot of the problems we have been having lately. What we give up is the potential for a big win but we gain the protection of broad diversification and low volatility.

Jim Brown

Send Jim an email

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.

XBI - Biotech ETF (Stopped)

Biotechs rolled over last week and closed at a six-week low today. We were stopped at $65.85 for a decent gain.

Closed Dec $60 short put, entry $1.10, exit .40, +.70 gain
Previously closed Dec $60 short put, entry $1.55, exit $1.50, +.05 gain
Retain Dec $50 long put, entry .41.

NFLX - Netflix (Stopped)

Netflix topped out at more than $130 the prior week to let our short put decay. In last week's volatility it rolled over and broke through support on Friday to stop us out for a nice gain.

Closed Dec $102.86 put, entry $1.23, exit .20, +1.03 gain
Retain Dec $93.57 short put, entry .46.

BLUE - Bluebird Bio (Closed)

The long put on BLUE was closed at the open on Thursday as planned.

Closed Dec $60 long put, entry .95, exit $3.70, +2.75 gain
Previously closed Dec $70 short put, entry $1.80, exit $3.90, -2.10 loss
Net gain 65 cents.

SWKS - Skyworks Solutions (Stopped)

Skyworks broke support in Friday's downdraft and then continued lower today. We were stopped out at $78.65.

Closed Jan $75 short put, entry $1.20, exit $2.15, -.95 loss
Retain Jan $65 long put, entry .33, currently .70.

FIT - FitBit (Stopped)

Fitbit flamed out last week and rolled over to give back most of what it had gained in the November 23rd rebound. We were stopped at $27.75 today.

Closed Jan $26 short put, entry $1.20, exit $1.85, -.65 loss
Retain Jan $22 long put, entry .48, currently .65.

New Recommendations

IWM - Russell 2000 ETF (Put Spread)

The next two weeks are typically the best two weeks of the year for the small cap stocks. However, you could not tell it from the decline today. The Russell fell -8 points while the other major indexes posted gains. However, there is decent support at 1,100 and I do believe a late year rally will appear. It may not be as strong as normal but we should see some gains.

I am picking strikes 115 points below the current index level at 1,115. I can't conceive of another 115 point drop in the next two weeks but this is the stock market and anything is possible but still not probable.

Sell short Jan $100 put, currently .53, stop loss $105.75
Buy long Jan $95 put, currently .27, no stop loss
Net credit 26 cents

QQQ - Nasdaq 100 ETF (Put Spread)

The Nasdaq 100 has sold off less than the other major indexes relative to its Aug/Sep lows. Large cap tech stocks are likely to be favored as window dressing for the end of December portfolio markup. With the QQQ declining only -4 points over the last week I seriously doubt it will drop another 10 to our short strike over the next several weeks. If it did that would be a major market meltdown.

Sell short Jan $100 put, currently .47, stop loss $105.75
Buy long Jan $94 put, currently .21, no stop loss
Net credit 26 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.

Closed short Dec $70 put entry $1.80, exit $3.90, -$2.10 loss
Closed long Dec $60 put, entry .95, exit $3.70, +$2.75 gain
Net gain $.65

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.

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.

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.

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.

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.

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.