Major declines for two Mondays in a row is a break from the recent trend of markets moving ever higher. Once is a short burst of profit taking. Twice in a row could be something to be concerned about.
Last Monday I thought the sharp drop was just a much needed pause to refresh after 29 days of gains by the S&P after the October 15th low. The Dow and S&P recovered to make new highs and the sharp dip was forgotten.
Today's drop was equally frightening for traders. Another triple digit decline on the Dow and the Nasdaq returned to the 4,725 low from the prior Monday. What happened to our momentum?
Both intraday dips had catalysts. The prior Monday there was a monster sell program in Apple that knocked it for an $8 loss intraday and soured the entire tech sector. This Monday it was another $3 drop in oil prices and a $3 drop in Apple thanks to multiple downgrades. Are you starting to see a trend here? Apple is about $8 off its highs and in danger of slipping lower. The decline by the largest stock in the tech sector is poisoning market sentiment for the Nasdaq.
Elsewhere the decline in the energy sector is persistent and ridiculous. Stocks are reaching 5-7 year lows and analysts are now predicting $40-$50 oil prices. Oil corrections tend to take on a life of their own and always over shoot reality.
December is historically bullish but there is normally tax selling early in the month. However, having the economies of Europe, Japan and China all moving lower is not supportive to a bullish U.S. market. We are still part of the world market even if we are the best house in a bad neighborhood. The economic flu is contagious.
Everyone hopes December will live up to its reputation but the last two Mondays are starting to weaken those hopes.
When I started my research for this newsletter the S&P futures were up +2.50. By the time I finished adding the plays the futures were down -6.00. There is a lot of darkness before morning so anything is possible.
PLEASE, if the market opens lower do not blindly enter these new recommendations. Wait for a positive market before entering new plays.
Send Jim an email
Long Term Positions
Current Position Changes
VJET - Voxeljet (Close)
The bearish call spread on VJET has run its course. Both options are only worth 10 cents or less and there is no reason to keep the position open and capital at risk.
Close short Dec $10 call, entry $1.79, currently .10, +1.69 gain.
Close long Dec $12 call, entry .55, currently .10, -.45 loss.
Net gain +1.24.
XONE - Exone Co (Close)
XONE has taken a turn for the worst. Over the last three days the stock has lost $3. We have a put spread on XONE and I am recommending we close the short put and keep the long put open. If the decline continues we can profit from the long put, which is already in the money.
Close short Dec $25 Put, entry $3.30, currently $5.20, -$1.90 loss.
Retain long Dec $20 put, entry .90, currently $1.90, +1.00 gain
MSFT - Microsoft (Close)
Microsoft was rebounding nicely from the October dip until the rebound failed last Thursday at the close. Shares closed just above support at $47.50 at the close and with the Nasdaq losing ground fast on Monday I don't want to take a chance of that support breaking. I am recommending we close the short side of the put spread and leave the long side open.
Close short Dec $50 put, entry 1.47, currently 2.32, -.85 loss.
Retain long Dec $48 put, entry .43, currently .75, +.32 gain.
BHI - Baker Hughes (Close/Write)
The Baker Hughes acquisition could not have come at a worse time. Apparently Halliburton felt the oil sell off had run its course or they would not have jumped in with an offer. Unfortunately the oil crash was about to pick up speed. The initial value of the acquisition was $78 but that included 1.19 shares of HAL stock. With oil falling another $13 in the last two weeks the value of HAL shares have collapsed. Shares are down from $55 to $38 over the last 3 weeks.
We sold a covered call on BHI expecting to see BHI shares in the $70-$75 range when the acquisition concluded in mid 2015. The idea was to sell multiple calls with the acquisition price as our backstop. I do believe oil prices will firm in 2015 and HAL shares will go back up to some higher level around $50. While we wait we need to continue to modify this position.
The January $67.50 call has declined from $2.65 to 25 cents. We need to close that call and sell a new April $62.50, currently $1.75. The acquisition is not expected to conclude until possibly Q3 2015 so we may be able to sell an additional two calls on this position before it ends.
Close Jan $67.50 call, entry $2.65, currently .25, +2.40 gain.
Sell to open Apr $62.50 call, currently $1.75, no stop.
New Short Put Recommendations
NGVC - Natural Grocers Vitamin Cottage (Put Spread)
NGVC has taken off after beating earnings on the 20th. Shares spiked +$4 (+20%) and then consolidated for over a week before moving higher. Shares closed at a new 7 month high on Monday. The market weakness had no impact on NGVC.
I am recommending we sell an ITM put at $30 for January and buy the $25 strike to complete the spread. The premiums are very nice with a net credit of $3.35. Remember, NGVC does not have to move over the short strike price to make money. It only needs to move higher than where it is today. Market permitting I think it could easily hit $28 or higher.
buy long Jan $25 put, currently $1.55, no initial stop.
Sell short Jan $30 put, currently $4.90, no initial stop.
Net credit $3.35.
SODA - SodaStream International (Bear call Spread)
Sodastream is not feeling the love from investors since they missed earnings for Q3, guided lower and said they were closing facilities. Later they said they were evolving into the health and wellness area and suggesting consumers drink more water. Their tagline was "SodaStream, Water Made Exciting" and it left investors feeling the company had lost its way. Shares closed at a new historic low on Monday. I am writing this up as a call spread but investors could also just buy a put because this company has lost focus from its original goals.
Buy long Jan $22.50 call, currently $.65, no initial stop.
Sell short Jan $17.50 call, currently $3.00, no initial stop.
Net credit $2.35
SNDK - SanDisk (Put Spread)
SanDisk is sprinting higher because of multiple factors. The first is the strong demand for the iPhone 6, which uses SanDisk Nand memory. Apple said users are moving to the higher capacity phones and this means additional SanDisk profits from Apple but also from other phone/tablet manufacturers trying to keep up with Apple. I believe SNDK will move over the $110 level thanks to the current iPhone 6 hysteria. They get 20% of their revenue from Apple and they are expected to sell 70 million units in Q4.
Buy long Jan $97.50 put, currently $1.31, no initial stop.
Sell short Jan $105 put, currently $3.40, no initial stop.
Net credit $2.09.
The following list of spreads were some that I looked at but did not add as recommended plays. If you are looking for something else to trade you might start with this list. These are NOT actual recommendations, just honorable mentions.
All are January strikes.
Symbol, strikes, type, net credit
ABC 90/95 put spread, $1.90
CPA 105/110 call spread $2.00
ESRX 82.5/87.5 put spread $2.20
CTRP 40/45 call spread $2.65
ECL 100/105 call spread $2.50
CYOU 20/23 call spread $1.20
DDD 30/33 call spread $1.50
CAB 50/55 call spread $1.50
FSLR 42/47 call spread $1.70
FUEL 12/17 call spread $1.50
GOGO 13/16 call spread $1.40
LVS 55/60 call spread $2.00
VMW 80/85 call spread $2.20
New Covered Call Recommendations
New Aggressive Recommendations
New Long Term Recommendations
Existing Play Recommendations
Links to original play recommendation
CLVS - Clovis Oncology (Aggressive Covered Call)
CLVS - Clovis Oncology (Update Existing Position)
CLVS - Clovis Oncology (Covered Jan Call)
HD - Home Depot (Put spread)
HOG - Harley Davidson (Put spread)
CSC - Computer Sciences (Put spread)
UNG - Natural Gas ETF (Put spread)
ACHC - Acadia Healthcare (Put spread)
BHI - Baker Hughes (Covered Call)
XONE - Exone Co (Put spread)
WWWW - Web.com (Put spread)
KORS - Michael Kors (Put spread)
VJET - Voxeljet (Bearish call spread)
MSFT - Microsoft (Put spread)
LNG - Cheniere Energy (Short Put)
APOL - Apollo Group (Put spread)
INTC - Intel Inc (Put spread)
CDK - CDK Global (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.