After two days of calm the volatility came roaring back. The potential for a new stimulus program in China plus a very active merger Monday powered the Dow to a +263 point gain. Where do we go from here?

In case anyone has a short memory March has been a month with alternating gains and losses and many days with intraday moves on the Dow of more than 200 points. Until today the S&P has not posted back to back gains for the last 28 trading sessions. That is how wild and volatile the market has been.

The big gains on Monday were simply a short squeeze. The overnight news plus the multiple acquisition announcements sent shorts into a panic and the Dow gapped open +278 points. There was no opportunity to cover shorts and every minor decline intraday was immediately bought as an opportunity to end the pain.

This is the end of the quarter so there should be some positive money flows this week but the Monday after Easter is typically the worst post holiday trading session of the year. The first two weeks of April are typically bullish but the last two weeks are typically bearish.

I am tired of the volatility. We have gotten whipsawed out of so many positions in the last six weeks it is painful. Selling premium is a bullish strategy and the alternating triple digit days has killed us.

According to S&P 84% of the Q1 guidance has been negative and the worst since 2009. This suggests the earnings cycle is going to be ugly but there is always the possibility the bad news is now priced into the market. I only added a couple plays today because of the potential for future volatility. We need to conserve our capital until a trend appears. I don't really care which way it is going just as long as it is directional. We can play either direction equally well as long as there is a trend.

I would not be surprised to see a negative day on Tuesday. These triple digit short squeezes have been temporary and until that changes we need to be cautious.

Jim Brown

Send Jim an email

Current Portfolio

The fourth column in the portfolio graphic is the earnings date. We will always exit a position before that date unless specifically mentioned otherwise in the play description. For the plays where we will not exit I added the No-X designation in the portfolio.

Current positions

Covered Calls

Current Position Changes

SPWR - SunPower (Stopped)

The short April $35 put was stopped out on the 26th when shares dropped below support and hit our stop loss at $29.65.

Closed April $35 Put, entry $3.05, exit $3.80, -.75 loss

FIVE - Five Below (Closed)

We had a leftover April $30 call on FIVE and I recommended closing it in the last newsletter.

Closed April $30 call, entry $1.20, exit $4.30, +3.10 gain.
Previously stopped April $25 call, entry $4.70, exit $5.50, -.80 loss
Net gain $2.30.

CRTO - Criteo (Stopped)

We were stopped on the short $45 put on CRTO when the stock fell below our $40.85 stop loss during the market crash on the 26th. The long put remains open.

Stopped short April $45 put, entry $3.20, exit $4.40, -1.20 loss.
Retain long April $40 put, entry $1.00, currently $1.40

AMBA - Ambarella (Stopped)

Ambarella crashed with the Sandisk warning to decline from $73 to $64 in two days. That stopped us out at $66.65 and of course the chipmaker rebounded to close at a new high today.

Closed May $65 put, entry $2.65, exit $4.20, -1.55 loss.

CSIQ - Canadian Solar (Stopped)

After being profitably called the prior week on the March position the April position was stopped out on the $4 decline by CSIQ over the last four days.

Closed CSIQ shares, entry $31.86, exit $32.85, +.99 gain.
Closed April $31 call, entry $3.00, exit $3.60, -.60 loss
Net gain 39 cents.

Baker Hughes (BHI) (Covered Call Update)

Baker Hughes and Halliburton shareholders approved the merger and now all that is necessary is for the government to bless it. With their $10 billion in proposed asset sales I don't think this will be a problem. Shares are rising because oil has firmed. While I think we will still see some weakness in WTI in the coming weeks we should also begin to see production slow. This will lift oil prices and therefore the price of Halliburton and by association the price of Baker Hughes.

I had thought the merger close would be sooner after the shareholder meeting. Since they are now saying the second half of 2015 I considered selling another covered call on BHI. The July $65 call is $2.20 today. The problem is that a gain in oil prices could lift stock prices significantly by mid second half. The flipside is that earnings are going to be terrible for Q1 and Q2. That could cause prices to fall. If you wrote a new call and prices fell you could buy it back cheaper. If however, oil rallied and Halliburton shares rose $5 then the shares of BHI would rise $5.60. BHI shareholders will receive 1.12 HAL shares, currently $43.82 and $19 in cash. The final value will change depending on the price of HAL shares. I could easily see HAL moving back over $50 on any continued firming in oil.

I am not going to recommend that readers currently in the BHI position add another covered call but that is an option you might want to consider. The premiums received would offset any price declines from earnings misses.

New Recommendations

CTL - Century Link (Bear Call Spread)

This is not your father's phone company. In fact none of the phone companies are like the ones we had 40 years ago. Today it is all about broadband access, mobile phones and dis/cable programming. Century Link is the old Quest and it is losing the phone company battle. Revenue continues to decline as land lines are terminated in favor of mobile phones serviced by Verizon, Sprint and AT&T. Companies like Century Link are being forced to partner with companies like Direct TV in order to have a TV offering. They are spending large amounts of money to run fiber optic cables to rural areas to offer broadband Internet. Everything costs more but the government is reducing the amount of Universal service Fund (USF) payments and has reformed the inter-carrier compensation rules, which reduces income to the phone companies. These companies are old tech and despite offering a cloud product they are being killed by the mobile phone competition in their basic service areas.

Earnings May 5th.

With a CTL trade at $33.95:

Sell short April $32 call, currently $2.10, stop loss $34.85
Buy long April $35 call, currently .25, no stop.
Net credit $1.85.

AMBA - Ambarella (Short Put)

Ambarella produces the video chips for GoPro cameras and other HD video capture applications. The system on a chip captures and compresses audio and video for integrated HD processing. They also provide chips for security cameras, camcorders, video traffic broadcasting and infrastructure monitoring applications. Business is booming.

Earnings June 2nd.

With an AMBA trade at $75.05:

Sell short May $70 put, currently $3.50, stop loss $71.25.

New Covered Call Recommendations

PRTA - Prothena Corporation

Prothena announced some positive results on an early stage trial of a Parkinsons drug on the 20th and shares spiked $10. They consolidated for the last six days and appear to be poised for a move over $40 which could trigger some short covering. Hey reported earnings on March 5th so they should not report again until early June although no date is available.

Prothena is definitely acquisition bait.

I am recommending an April call and if successful we will do it again for May.

You could also sell the April $40 put for $3.00 if you don't want to do the covered call.

With a PRTA trade at $40.25:

Buy write PRTA April $40 call, currently $39.37, $2.50, no initial stop.
Net gain if called $3.13.

New Aggressive Recommendations


New Long Term Recommendations


Existing Play Recommendations

Links to original play recommendation

BHI - Baker Hughes (Covered Call)

CSIQ - Canadian Solar (Covered Call)

RKT - Rock-Tenn (Put spread)

SPWR - SunPower (Short put)

CSIQ - Canadian Solar (Covered Call)

HPQ - Hewlett Packard (Bear call spread)

TASR - Taser Intl (Bear call spread)

IM - Ingram Micro (Bear call spread)

FIVE - Five Below (Bear call spread)

CRTO - Criteo SA (Put spread)

RGR - Sturm Ruger (Put spread)

SFM - Sprouts farmers Market (Bear call spread)

VA - Virgin Airlines (Bear call spread)

WWWW - (Put spread)

AMBA - Ambarella (Short Put)

Margin Requirements:

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.