A note by an analyst caused a -14% drop in one of our positions that erased our profits and left us with a breakeven.
Seeking Alpha, not necessarily the Goldman Sachs of the investment recommendation world, wrote that 3D Systems was overvalued due to a bubble in the three dimensional printing sector. 3D Systems lost -$10 on Monday as a result of that article. Despite the drop we are still at a breakeven on that position because we got into it before the recent spike. However, Stratasys (SSYS) their competitor in the space and also a play declined -10% and that one did knock us back into negative territory.
I think the declines in the 3D stocks are symptomatic of what we could see in the broader market in the weeks ahead. Stocks are priced to perfection with the major indexes at multiyear highs. It won't take much for traders to panic and race for the sidelines as we saw in the 3D stocks.
Nobody knows what news item could be the straw that breaks the market's back. It could be negativity out of Europe, a news story out of the Middle East or something simple like a badly worded phrase in Wednesday's FOMC announcement. There is also the Q4 GDP, ISM and Nonfarm Payrolls. There is plenty on the calendar that could trip up the market.
I think the market wants to go up but traders are starting to become increasingly nervous. Everyone wants to see new highs but given the size of the January rally they have no conviction that the Dow and S&P can actually break through those historic highs. There are plenty of analysts now suggesting the market should pullback 3% to 5% before making a credible attempt at new highs. I am in that camp.
The offsetting factor to this sell off worry is the selloff in bonds. The yield on the ten-year treasury traded over 2% today and that is the highest level since April. Bonds are being sold and that money is rotating into the stock market. The bond money could continue to push stocks higher. There is plenty of cash still on the sidelines and once it appears the bond rotation is picking up speed that cash will rush off the sidelines in an effort to beat the rotating cash to the equity market.
If you have been investing for long you know that February is not normally a bullish month for the market. The end of year retirement cash has already been put to work and the Q4 earnings cycle is coming to an end. Economics tend to slow after the holidays and this all adds up to profit taking in February. The bond rotation this year could kill that seasonal trend and it is also possible that rotation slows until after the February/March legislative battles.
There is never a sure thing in the market. We try to find the best choices and then deal with the potholes as they appear. I fear we are heading for a rough stretch of road but not one that can't be navigated carefully. I plan on keeping a small list of recommendations over the next several weeks until a dip appears that will reduce our risk.
Send Jim an email
Current Position Changes
EXPE - Expedia Inc (Short Put - Stopped)
Expedia dropped below our stop loss at $61.25 on January 22nd and took us out of the play. The option was $2.73 at the time to leave us with a 43 cent loss. Of course that was the low point for the month and EXPE closed at a new high on Monday at $66.66.
Stopped EXPE Feb $60 Put, entry $2.30, exit $2.73, -0.43 loss.
NFLX - Netflix (Short Put - Closed)
I warned last week to exit the NetFlix position before earnings just in case they missed estimates because the volatility in NFLX can be huge. It was bigger than huge after they beat estimates and the stock rallied $66. We know from experience that those swings can go either way on NFLX so I am not sad we exited. We made a nice profit and avoided all the drama.
Closed NFLX Short Feb $75 Put, entry $2.98, exit 0.52, +2.46 gain
FLS - Flowserve (Short Put - Close)
Earnings on FLS are not for several weeks but we have a very nice profit and the option has declined to a minimal value. There is nothing left to gain by holding it open. Shares of FLS are starting to roll over and are resting on support at $152. Close the April short put position.
Close FLS April $125 Put, entry $4.72, currently 0.50, +4.22 gain.
DDD - 3D Systems (Short Put - Close)
3D was crushed by an article on Seeking Alpha saying the 3D printing sector was in a bubble and shares were overvalued. 3D fell -$9.57 on Monday and did not hit our stop but came close. This selloff could continue if the market weakens so I am recommending we close this position for a breakeven.
Close DDD Feb $55 Put, entry $1.85, currently $1.80, +0.05 gain
SSYS - Stratasys (Short Put - Stopped)
The SSYS put was stopped out by the article on 3D Systems and the possible bubble in the stocks. The stop loss was $82.95 and that was hit at 9:40 this morning. The option was trading at $4.70 giving us a loss of $1.85.
Stopped SSYS Short Mar $80 Put, entry $2.83, exit $4.70, -1.85 loss.
New Short Put Recommendations
NFLX - NefFlix (Short Put)
The spike in NetFlix followed by the -7 decline today has inflated put premiums significantly. Carl Icahn was out pounding the table on NFLX again saying it is going higher. Given the $75 gain last week the -$7 drop today was nothing. I do expect some more profit taking but I also expect it to hold the majority of its gains. The earnings were much better than expected and the subscriber growth was strong.
I was initially going to pick the April $140 put strike for $8.70 in premium but due to excess caution I am dropping back to the $130 strike for $5.90. With NFLX at $162 that would be a $30 drop and I don't see anything in the near future that could knock that much off NFLX since they already released earnings.
I am going to use a stop just to be safe. The premium should fade quickly once the post earnings drop ends.
Sell short NFLX April $130 Put, currently $5.90, stop $138.75
New Covered Call Recommendations
New Long Term Recommendations
New Aggressive Recommendations
Existing Play Recommendations
Links to original play recommendation
RIG - Transocean (Covered Call)
FLS - FlowServe (Short Put)
WLT - Walter Energy (Covered Call)
NFLX - NetFlix (Short Put)
KORS - Michael Kors (Short Put)
VIX - Volatility Index (Short Put)
EXPE - Expedia (Short Put)
DDD - 3D Systems (Short Put)
SYSS - Stratsys Inc (Short Put)
CAB - Cabellas (Short Put)
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.