The market is moving slowly with one small reluctant step after another in a bearish direction.
The Dow, S&P and Nasdaq all declined slightly today despite the late afternoon spurt of dip buying. Sentiment appears to be fading but it could be just a healthy dose of caution ahead of a busy economic calendar later in the week.
August is rarely kind to the markets but this rally has overcome many hurdles in the last eight months. Individual stocks and sectors have not been so lucky.
For instance the sudden drop in new home sales last week crushed the homebuilders and caused two of our covered calls to take losses. Pulte declined -$3 on the negative news and broke below critical support. I am closing the August call on Pulte because there is no further upside to the option at 3 cents.
By removing unexpired calls we can capture the full appreciation in the stock on news headlines or even acquisition announcements. Leaving a worthless unexpired call open limits potential profits from unexpected events. Beaten down stocks tend to attract suitors and partners. Once the stock rebounds slightly and the call premiums inflate we will sell a new call.
We are facing some very volatile events later this week. The GDP for Q2, FOMC announcement, ADP Employment, ISM Manufacturing and Nonfarm Payrolls. Entering new positions ahead of these events is very dangerous. However, we could just as easily have a blowout to the upside if the potential news comes in better than expected.
I looked at more than 500 charts today and they had either already reported earnings and crashed or will report earnings in the next couple of weeks and carried too much risk. I only added two positions as a result.
I am still expecting a weak market in August. The rate of climb has slowed and that suggests the market is tiring.
Send Jim an email
Current Position Changes
GOLD - Rangold Resources (Closed)
The Rangold position was closed at the open on Tuesday as planned.
Closed GOLD AUG $60 Put, entry $2.55, exit .25, +$2.30 gain.
Z - Zillow (Closed)
The Zillow August $50 put was closed at the open on Tuesday as planned.
Closed Z Aug $50 put, entry $3.20, exit .45, +2.75 gain
PHM - Pulte Homes (Close)
The short call on Pulte has declined to 3 cents. There is nothing further to be gained by leaving the position open. If we close it now we can write another call on the next bounce.
Pulte was crushed last week on the unexpected drop in new home sales. The entire sector was decimated. It may be several more months before we can recover the $3 drop in the stock.
I am not selling a new call today because there is no premium after three days of declines. We need a bounce to inflate the premiums.
Close PHM Aug $21 Call, entry .54, currently .03, +.51 gain.
BBRY - BlackBerry (Add put)
The disappointing news on Blackberry earnings last month has not gone away. BBRY continues to decline a few cents a day. Rather than take the current $4.50 loss and sell the stock I am recommending we buy an $8 put for 42 cents. It will limit further downside and allow us time for good news to appear. There are weekly rumors of acquisition discussions, spinoffs and new investors. Microsoft is constantly rumored as a possible acquirer since the Windows phones are not selling well. With Microsoft's cash hoard they could quickly ramp up production and advertising on a proven platform. All we need to do is protect ourselves and wait it out until we can sell calls from a profitable position.
Buy BBRY Sept $8 put, currently .42, no stop
CRR - Carbo Ceramics (Close)
We have a Sept $65 short put on CRR and the stock exploded higher after earnings. With the put premium at 30 cents there is nothing material to be gained by leaving the position open. Close it at the open on Tuesday.
Buy to close CRR Sept $65 put, entry $3.50, currently .30, +3.20 gain.
SRPT - Sarepta Therapeutics (Closed)
It was only one week option. Unfortunately it turned out to the week that bad news broke about their drug approval process. The news was not supposed to come out for another three weeks and the surprise update shocked the momentum crowd that were expecting a couple more weeks of gains before the news.
Sarepta announced the potential calendar for applying for drug approval and it was not as aggressive as investors hoped. The stock fell $10 on the 24th and is still falling.
The instructions said to sell the stock immediately if we were not called and that would have happened at the open on Monday at $36.96. That was a $9.56 loss in the stock price and we received $4.50 in premium for the option leaving us with a $5.06 loss. Sometimes when something looks too good to be true, as in those huge option premiums last week, it really is too good to be true.
Closed SRPT stock, entry $46.52, exit $36.96, -9.56 loss
Expired July Week 4 $46 Call, entry $4.50, expired, +4.50 gain
Net loss $4.50 - 9.56 = -5.06
OUTR - Outerwall (Stopped)
The stop loss of $60.95 on Outerwall was hit on Friday to take us out of the short put. Fortunately that happened at the open and we avoided the continued drop to $55.
We exited the play with a small profit thanks to premium decay ahead of the event.
Closed Aug $57.50 put, entry $1.95, exit $1.15, +.80 gain.
New Short Put Recommendations
QIHU - Qihoo 360 Technology
Qihoo is now the number two search engine in China and the pace of growth is accelerating. BIDU is the largest. Qihoo started out selling a mobile browser that worked very well and leveraged that application into becoming a top search engine provider.
The company is in talks to acquire the search engin technology from SOHU to gain additional scale.
The current fundamentals do not support a continued rise in price but momentum stocks rarely rise on fundamentals. This is a play on the rapidly rising search engine market in China. Even with all the gains over the last couple of years it can still quadruple in the years ahead. China is a huge country with 1.2 billion citizens and plenty of market share still untouched.
Earnings are August 21st. At the present rate of gains we could be out of the position before the 21st.
Option premiums are high and justify the risk of a Chinese stock.
Sell short QIHU Sept $55 Put, currently $2.65, stop $56.50
New Covered Call Recommendations
New Aggressive Recommendations
TSLA - Tesla Motors (Short Put)
When a stock is working we should not leave it and try to take a chance on something else. Stick with what works. We currently have a covered call on Tesla that is in the money and doing great. There is no reason not to double up on the stock since the premiums are very large.
Tesla broke out to a new high on Monday and looks like it could run another $20. However, the risk here and the reason for the very high premiums are the earnings on August 7th. Hardly a day goes by that some analyst is not upgrading the company but earnings expectations remain relatively low. Tesla has a history of recent surprises. I expect them to surprise again but there is always that risk.
I am going to recommend a $120 put with TSLA at $134. If the market cooperates it could be $140 before earnings. That means a diasppointment would have to knock $20 off the stock price to really hurt us. You saw what happened when $20 was knocked off on July 16th. It took two weeks to make a new high. This is the mother of all momentum stocks.
DO NOT ENTER THIS TRADE IF YOU CAN'T ACCEPT THE RISK.
Sell TSLA Sept $120 Put, currently $7.00, no stop because this stock is volatile.
New Long Term Recommendations
Existing Play Recommendations
Links to original play recommendation
PHM - Pulte Homes (Covered Call)
PHM - Pulte Homes (CC Update)
GMCR - Green Mountain Coffee (Covered Call)
GMCR - Green Mountain Coffee (CC Update)
SLW - Silver Wheaton (Covered Call)
SLW - Silver Wheaton (CC Update)
BZH - Beazer Homes (Covered Call)
JASO - JA Solar (Covered Call)
LGF - Lions Gate Films (Covered Call)
LGF - Lions Gate (CC Update)
BBRY - BlackBerry (Covered Call)
Z - Zillow (Short Put)
CRR - Carbo Ceramics (Short Put)
GOLD - Rangold Resources (Short Put)
OUTR - Outerwall (Short Put)
TSLA - Tesla Motors (Covered Call)
FSLR - First Solar (Short Put)
GMCR - Green Mountain (Short Put)
CSIQ - Canadian Solar (Covered Call)
JASO - JA Solar (Covered Call)
SRPT - Sarepta Theraputics (Covered Call)
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.