The markets shook off the negative surprise from the Nonfarm Payrolls on Friday but there was no follow through. The indexes weakened at the close and the direction is still uncertain. With a minimum of economic reports this week and the earnings cycle starting next week, investors are undecided whether to buy or sell.

The opening decline on Monday failed to penetrate as far as the prior dips over the last two weeks. Since S&P futures were down -22 on Friday that is encouraging. The futures rebounded to a "normal" gap down open and traders bought the dip. It appears nobody is worried about the slowing economy or the expected decline in Q1 earnings. The negative earnings have been so widely telegraphed that investors no longer seem concerned.

The payroll report appears to have pushed the chances of a Fed rate hike out to September or even January/March on some forecasts. The chance of a June hike is only about 11% according to the Fed funds futures.

While the market is stubbornly refusing to move below support the breadth is shrinking. I am seeing more and more charts that have taken a negative turn. The small caps are still leading but they need some help from the troops. The generals are leading but very few of the rank and file are following them higher.

I noticed another challenge this weekend. The crowd favorites are almost all showing a negative trend. Stocks that were always in the news several weeks ago like FireEye (FEYE) are no longer in the race. Also, biotechs and pharmaceutical stocks are taking a breather along with the chip sector. The prior leaders are now laggards.

This is troubling for the overall market. When one sector is down it is normally supported by the others. We are seeing multiple sectors weaken and that is not a good sign. With the sell in May cycle rapidly approaching it could be that some investors are getting an early start.

The market needs a catalyst and I don't know what that is going to be unless earnings surprise to the upside and that will take 2-3 weeks before we can decipher that trend.

Be cautious with your new positions. Selling premium in this volatile market is dangerous. However, we were only stopped out of one position last week so we can't complain.

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

SFM - Spouts Farmers Market (Stopped)

The short April $30 call was stopped out last Tuesday when Morgan Stanley sent a note to investors saying it was their "best idea." Morgan stanley said the recent decline made the stock a "very attractive" time to buy. They put a $40 price target on the shares. Shares gapped open and rallied $2 on the news. We were stopped out on the gap open at $33.85. Because it was a gap open the call premiums rocketed higher and we took a significant hit on the play. On the bright side the long call is now up strongly and in the money. Let's hope the trend continues.

Closed Short April $30 call, entry $3.17, exit $4.84, -1.67 loss.
Retain Long April $35 call, entry .35, currently $1.00, +.65 gain as of today.

CTL - Century Link (Cancel)

Century Link closed at a 52-week low on Monday at $34.06 when I recommended a bear call spread last week. On Tuesday it gapped open and ran up to $35.68 the next day when Bank of America Merrill Lynch reiterated a buy rating and pounded the table on its strong 6.25% dividend along with a $42 price target. The gap open prevented the play from being triggered at $33.95 and I am cancelling the recommendation.

Cancel the CTL bear call spread

New Recommendations

KORS - Michael Kors (Bear call Spread)

KORS has fallen on hard times. Shares have been declining since last May and analysts are turning negative on the stock. Rising competition and strong discounting as a result of a weak consumer is pressuring comps.

Piper Jaffray said last week that it was cutting KORS from buy to neutral and dropped the price target from $89 to $70. Piper said North American comps were declining fast. Store checks and web analytics suggested a deceleration of domestic search activity for the brand. Activity dipped into negative territory for the first time on a quarterly basis. Over the last three quarters North American comps have declined -21%. Canaccord recently downgraded KORS from buy to hold.

Earnings are May 27th.

Sell May $60 call, currently $4.20, stop loss $65.65
Buy long May $65 call, currently $$1.50, no stop.

NUS - NuSkin (Short Put)

Fortunes are improving for the multilevel marketing crowd. Herbalife is no longer in danger of going to zero and some of the shorts are bailing out. This has taken the pressure off NuSkin and the stock closed at a nine-month high on Monday. This is a breakout for NuSkin, which has suffered from the numerous attacks on Herbalife.

Earnings are May 6th so I am using a May week 1 option. You could actually make more money with a covered call because the options prices are double. However a $62 covered call is too pricey for me.

Sell short May $60 put, currently $1.60.
No initial stop because of volatility. Will add it next week.

Alternative positions

If you are looking for something else to play you might consider these but they are not official recommendations.

Call spreads:

APOL - Earnings June 24th. Sell May $19 call, buy May $16. $2.24/$.54

INFY - Earnings April 24th. Sell April $32.50, buy Apr $35, $2.00/$.45

RENT - Earnings May 7th. Sell April $50, buy Apr $55, $3.00/$1.00

Short Puts:

QIHU - Earnings May 27th, May $50 put, $1.65

CTRP - Earnings June 18th, May $57.50 put, $1.95

New Covered Call Recommendations

SRPT - Sarepta Therapeutics

We have played SRPT multiple times and the chart is lining up for another covered call. Earnings are not until late May and the May $15 call is $1.70 with SRPT at $14.72. That equates to a $1.98 gain on a $15 stock if called. SRPT has been consolidating from a beating for the last several months but the trend is improving. The CEO resigned last week and that has lifted the stock.

Earnings May 28th.

Buy-write SRPT May $15 call, currently $14.72-$1.70. Stop loss $12.45

New Aggressive Recommendations


New Long Term Recommendations


Existing Play Recommendations

Links to original play recommendation

BHI - Baker Hughes (Covered Call)

HPQ - Hewlett Packard (Bear call spread)

TASR - Taser Intl (Bear call spread)

IM - Ingram Micro (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)

CTL - Century Link (Bear call spread)

AMBA - Ambarella (Short Put)

PRTA - Prothena (Covered Call)

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.