This is the busiest week of earnings season with 12 Dow components and 133 S&P components reporting.
The early reporters last week had better than average guidance and 64% beat earnings estimates. About 57% beat on revenue and 77% raised guidance. Considering the crummy quarter in Q1 this is an improvement.
There are still a few high profile misses but also some high profile winners. Chipotle Mexican Grill (CMG) blew away earnings on Monday and the stock rallied $57 in afterhours. Netflix (NFLX) missed by a penny but beat on revenue and now has more than 50 million subscribers. Shares were volatile but finished the afterhours session with a gain.
With all the earnings reports coming out over the next three weeks it was impossible to avoid picking some plays with earnings prior to expiration. On a couple plays I recommended protective puts to get around the potential for a post earnings implosion.
Market volatility has increased thanks to the Russian, Israeli and Iranian headlines. However, unless we appear to be headed for some military involvement I think the damage has now been priced into the market.
What is not priced into the market is the potential for a summer decline. Right now all the dips are being bought and as long as that trend continues we should be in good shape. Just be aware that the trend could change at any point and very quickly.
While nobody knows for sure quite a few people are expecting a late 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
Here are the earnings dates for our current positions. We need to be out of the positions before the earnings. That is not applicable for the long term positions or stock held for future call writing. Covered call positions will be evaluated the week before the expiration. Most of our current calls expire in July and will not be a problem. Some don't.
FB - 7/23
LGF - 8/28
CBI - 7/24
LNG - 7/31
NOW - 7/30
FEYE - 8/05
EMES - N/A
SCTY - 8/06
CLVS - 8/07
PANW - 8/27
After the big spike in KNDI shares last week I recommended we close that position. This was a stock position left over from a covered call play that expired out of the money.
Closed KNDI shares, adjusted entry 17.65, exit $19.13, +1.48 gain.
ITMN - Intermune (Covered Call - Expired - Close)
After being in the money for over a month ITMN declined to $41.70 at the close on Friday and our short $42 July call expired. This was a big win for us because the stock rallied back to $43.31 today and gave us an even bigger gain.
I am recommending we close the ITMN stock position at the open on Tuesday.
Close ITMN shares, entry $39.56, currently $43.31, +3.75 gain
Expired July $42 Call, entry $1.84, exit $.00, +1.84 gain.
Net gain +$5.59.
AMBA - Ambarella (Stopped)
The dip below $30 on no news stopped us out at $29.85.
The loss was minimal on the August $33 covered call but still a loss.
We also had a short August $30 put that was also stopped out for a small loss.
Closed AMBA shares, entry $30.45, exit $29.85, -.60 loss
Closed Aug $33 Call, entry $1.17, exit $.60, +.57 gain.
Net loss -0.03 cents.
Closed AMBA Aug $30 Put, entry $1.30, exit $1.85, -.55 loss
GTAT - GT Advanced (stopped)
The market decline on Thursday knocked GTAT under $15 to knock us out of this position. We did exit for a minor gain.
Closed GTAT shares, entry $14.11, exit $14.85, +.74 gain.
Closed Sept $17 call, entry $1.05, exit $1.00, -.05 loss.
Net gain +.69 cents.
New Short Put Recommendations
LNG - Cheniere Energy
Cheniere declined to strong support at $70.50 over the last two weeks and every attempt to push it lower failed. On Friday they signed a new 20 year agreement with French power company EDF to sell LNG. The company is continuing to sign long term agreements and has completely committed the first two trains at the Corpus Christi facility and the first four trains at the Sabine Pass facility.
With the worry over Putin cutting off gas to Europe the LNG stocks are rising. While the first shipment of LNG by Cheniere won't be until late 2015 at the earliest they are still the leader in the field.
Earnings are July 31st but they don't have earnings because they are in the construction phase. Nobody cares what they post in earnings but the company always uses the event to brag about their progress.
I expect support at $70.50 to hold unless something really ugly pops up.
Sell Sept $70 put, currently $2.74, no initial stop.
FEYE - FireEye
We played FEYE several ways over the last couple months and after the early July dip the rebound has begun. Earnings are August 5th so we have a couple weeks of premium decay before we have to worry about an earnings event. If the play is going in our direction I will probably recommend a short term protective put just befor earnings or simply close the position for a profit.
Sell short Sept $36 put, currently $3.80, stop loss $32.75.
PANW - Palo-Alto Networks
PANW is rebounding strongly after the Russell 2000 sell off over the last two weeks. Goldman Sachs initiated coverage with a Conviction Buy and a price target of $97. PANW is currently $80. Goldman said they were a security sector "disruptor" and they called PANW their "top pick" in the sector.
In a Goldman survey 59% of IT managers said they were going to increase spending on security with FEYE and PANW the favored stocks.
Earnings are August 27th so we can get away with using an August WK4 put, which will expire before earnings.
Sell short August WK4 $78 put, currently $2.75, stop loss $74.85.
New Covered Call Recommendations
New Aggressive Recommendations
SCTY - Solar City
Solar City was in the middle of a strong rebound thanks to recent announcements by Elon Musk. On July 2nd they said they were suing the State of Arizona because the state had decided to tax solar installations. SunRun also sued the state. The worry is that Arizona, the state with the 2nd highest solar installations, could see demand decline thanks to the tax. Analysts looking at the tax after July 1st say it is not a big deal and demand should not be materially affected. The stock sold off for three days, sideways for over a week and now it is catching fire again.
Shares are at $69 and rising with the July 2nd high at $76. Earnings are August 6th. Option premiums expiring after the 6th are twice what those are before the 6th for obvious reasons. I believe SCTY is either going to post blowout numbers or disappoint because expectations are so high.
Canaccord Genuity initiated coverage of SCTY with a buy rating and $94 price target. SolarCity "has changed the landscape of the residential solar market, taking advantage of investor's tax appetite and a desire for yield to install more solar systems than many of its largest competitors combined," analyst Josh Baribeau wrote.
I am proposing we sell the September $75 put, currently $10.45. I am also recommending we buy the August week two $65 put expiring on August 8th for $2.73. If SCTY bombs the earnings we close both positions for what should be close to breakeven or just close the long put for a profit and ride out the $75 put if it appears it will rebound. If SCTY blows out earnings the week two put expires and we have a rising stock and roughly an $8 gain if it moves over $75.
This is an AGGRESSIVE play.
Sell Sept $75 Put, currently $10.45, no initial stop.
Buy Aug WK2 $65 put, currently $2.73, no initial stop.
NOW - ServiceNow
NOW is a cloud computing company that automates enterprise IT operations. The company offers IT service automation applications, including incident management, problem management, change management, release management, request management, configuration management, asset management, project portfolio, software development lifecycle management, IT cost management, work management, vendor performance management, and resource management, as well as IT governance, risk, and compliance; case management applications, such as HR service automation that provide capabilities to manage the service delivery of human resources departments; and options and add-ons services, such as performance analytics and discovery services, as well as orchestration core, cloud provisioning, password reset, and configuration automation applications.
Shares declined on July 7/8th after they announced they were buying Neebula Systems for $100 million. After the sell off the stock moved sideways for a week and has now begun to rebound after being mentioned at the Delivering Alpha conference last week.
Earnings are July 30th so we are going to need a protective put. If earnings are positive I expect to see a return to the $65 level from early July.
This is an AGGRESSIVE play.
Sell short Sept $65 put, currently $8.00, no initial stop.
Buy Aug $55 put, currently $1.90, no initial stop.
New Long Term Recommendations
Existing Play Recommendations
Links to original play recommendation
CLVS - Clovis Oncology (Aggressive Covered Call)
CLVS - Clovis Oncology (Update Existing Position)
FB - Facebook (Long Term Short Put)
MOBI - Sky-Mobi Ltd (Covered Call)
KNDI - Kandi Technology (Covered Call)
PRAN - Prana Biotech (Short Put - Update)
GTAT - GT Advanced (Covered Call)
ITMN - Intermune (Covered Call)
LGF - Lions Gate Ent (Short Put)
AMBA - Ambarella (Short Put)
CBI - Chicago Bridge (LT Short Put)
EMES - Emerge Energy Svcs (LT 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.