The reason for that volatility is the war in Iraq but it all counts when you are selling premium.
The sudden spike in oil prices as a result of the Iraq war knocked us out of the three airline positions but fortunately the biggest loss was 16 cents. High oil prices and airlines don't work well together.
The markets closed higher for the second consecutive day and that suggests the worry over the Iraq headlines is rapidly fading. The Iraqi army is finally fighting back and they have all the airpower on their side.
Option premiums finally began to inflate slightly with the VIX rising to 12.65 but the premiums inflating the most were the call premiums. Puts are too cheap to sell unless you want to take on a lot of risk.
I added some longer term covered calls where we could get some decent premium on stocks that had great charts. We may need to hold them a little longer than normal but the returns will be outstanding if called.
The next volatility event will be the FOMC meeting on Wednesday and Janet Yellen's press conference. I am worried she might try to add some volatility to the treasury market and that could upset equities as well.
This is a triple witching option expiration cycle and the end of the week is typically bullish. However, in the normal June cycle the week after expiration has been down 21 of the last 24 years. That is a pretty strong record so be prepared for anything. Past performance is no guarantee of future results but we should still pay attention.
While nobody knows for sure and quite a few people are expecting a summer decline I would caution you not to overextend your personal portfolio. Take smaller positions and only those you feel comfortable holding through some market volatility.
Send Jim an email
Long Term Positions
Click for 2014 Statistics through February
Click for 2013 Statistics
Current Position Changes
EXAS - Exact Sciences (Close)
The July $11 put on EXAS has declined to only 15 cents and does not justify the continued risk in keeping the play open for another month. I am recommending we close this position. You could sell a higher strike but you have to reach out to October to get any decent premium.
Close July $11 Put, entry .70, currently .15, +.55 gain.
EMES - Emerge Energy Services (Stopped)
Emerge plunged from $114 to $95 over four days to trigger our stop loss at $99.25. There was no reason for the selloff and there was no news. This was simply a bout of profit taking in a weak market. I have seen a couple dozen of charts that look exactly like this. The big momentum winners were knocked for big losses and then rebounded late last week.
Closed July $90 Put, entry $4.20, exit $3.00, +1.20 gain.
AAL, DAL, UAL (Stopped)
The sudden arrival of the Iraq war and the sudden spike in crude oil prices from $101 to $107 has crushed the airlines where the fuel cost is their biggest expense. Unfortunately, because airlines were in such a nice uptrend ahead of summer we had three of them in the portfolio. Fortunately the losses were minor because the premiums had already declined and the stop losses kept us out of trouble.
Closed AAL July $39 Put, entry .90, exit $1.00, -.10 loss
Closed DAL July $39 Put, entry .85, exit .95, -.10 loss
Closed UAL July $43 Put, entry $1.15, exit $1.31, -.16 loss
ARWR - Arrowhead Research (Expiring)
We have a June $11 call on ARWR and the stock closed at $13.42 today. Assuming the market does not implode we should be called away this Friday. Monitor the stock price and don't let an unexpected move put you in danger of holding the stock. I would put a $10.97 stop loss on the position just in case. If the stock were to plunge to that level by Friday the option premium would evaporate to near zero. You can stop out and still end up with a nice profit.
Long ARWR stock, short Jun $11 call, raise stop to $10.97
KNDI, MOBI, PRAN (Update)
We have three stocks in the portfolio where there were significant declines while we were holding covered calls. The calls have expired and we were left with the stocks.
KNDI is trying to rebound. Shares have moved up from support at $11 and could be moving to a new two-month high in the coming days. We need it to get back to $17 to be profitable again. If we can get a little more momentum out of KNDI we can sell another call and reduce our cost. We don't want to be called away under $17 so we have to be careful what we sell.
MOBI is stuck in a sideways motion above $6 and can't seem to maintain any upward momentum. If we sold a $7.50 put for 60 cents it would cap our loss if MOBI suddenly accelerated higher. I prefer to continue sitting on the stock and wait for the next headline.
About the only thing I can say positive about PRAN is that it quit going down. This is a biotech company and we know how quickly they can move on news headlines. We just need to be patient. We are holding three November $3 calls to help repair the position on any rebound.
New Short Put Recommendations
AAL - American Airlines (Short Put)
I believe the spike in oil prices is over. Even if they do move up a little higher the impact to the airlines has already been felt. American crashed back to $39 and rebounded +$2 in two days. I believe their rebound will take them back to the $44 highs we saw last week.
Sell Aug $40 Put, currently $2.05, stop $38.85
New Covered Call Recommendations
ISIS - Isis Pharmaceuticals
We already have a short term and long term covered calls on ISIS but the stock is rebounding so nicely I am going to add another short term call as well for those who missed the last play. ISIS, no relation to the jihadists in Iraq, broke over some consolidation today to close at a 6 week high. It is rebounding nicely from the March selloff.
Buy-write ISIS July $36 call, currently $34.78-$2.05, stop $29.45
Gain if called $3.27
New Aggressive Recommendations
IOC - Interoil Corp (Covered Call)
I put this play in the aggressive section because IOC has been volatile in the past. They typically carried huge premiums but volatility to match. Since the last time we played them they have gained respectability with a couple major deals that turned them into a real company. They always had enormous oil and gas reserves but no money to explore for them. They partnered with a couple heavyweights and premiums have declined and the volatility has eased. Even with the decline in volatility and premiums the longer term calls are still high. If we are called out of this play as expected we could make around $6.43.
Shares are about to move over the 300-day average to a new six-month high and that should attract more buyers.
Buy-write IOC Sept $70 call, currently $66.67-$3.10, stop loss $62.85
New Long Term Recommendations
TAN - Solar ETF (covered call)
I wrote up TAN as a long play in Ultimate Investor today and saw that the call premiums were pretty decent in the October strikes. I thought TAN would make a good intermediate term covered call.
TAN is an ETF that holds 26 solar stocks. The top ten stocks represent 60% of the ETF holdings. Three of the largest ones are FSLR, SPWR and SCTY. With president Obama's big solar push and the announcement last week of tariffs on Chinese solar panels the ETF should continue to rebound. Shares broke over the resistance at the 100-day average today.
Buy-write TAN Oct $45 Call, currently $42.75-$2.75, stop loss $39.25
Gain if called $5.00.
FEYE - FireEye Inc (covered call)
FireEye collapsed in March as a result of a secondary offering, a lockup expiration and some selling by insiders to pay taxes. The earnings in May had a hiccup but the guidance was strong. The stock is rebounding strongly from the combination of the factors that caused the dip.
We already have a short put on the stock that could be closed in the next week or two if the rebound continues.
I am recommending a September call with a huge premium. If we are called as expected we could make $8 on a $38 stock.
I am setting the initial stop loss low but I will raise it quickly as FEYE progresses.
Buy-write FEYE Sept $43 Call, currently $38.04-$3.00, stop $29.75
Existing Play Recommendations
Links to original play recommendation
CLVS - Clovis Oncology (Aggressive Covered Call)
FB - Facebook (Long Term Short Put)
MOBI - Sky-Mobi Ltd (Covered Call)
KNDI - Kandi Technology (Covered Call)
NUS - NuSkin (Aggressive Short Put)
PRAN - Prana Biotech (Short Put - Update)
APC - Anadarko (Long Term Short Put)
ARWR - Arrowhead Research (Covered Call)
EXAS - Exact Sciences (Short Put)
GTAT - GT Advanced (Covered Call)
YNDX - Yandex (Covered Call)
ISIS - Isis Pharma (Covered Call)
ISIS - Isis Pharma (Long Term Covered Call)
ITMN - Intermune (Covered Call)
FEYE - FireEye (Short Put)
EMES - Emerge Energy (Short Put)
YELP - Yelp Inc (Short Put)
AAL - American Airlines (Short Put)
DAL - Delta Airlines (Short Put)
UAL - United Continental (Short Put)
GBX - Greenbrier (Short Put)
CLVS - Clovis Oncology (Update Existing Position)
CLVS - Clovis Oncology (New Call/Put)
ARWR - Arrowhead Research (Covered Call)
GOGO - GOGO Inc (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.