The Russell 2000 made a new intraday high at 1,271 on Monday but slipped back slightly to close at 1,265. That is one point below its historic high close. The NYSE touched 11,123 and a new high but slipped to close at 11,056. The market is trying to push higher but fear of earnings is holding it back.

The market is showing some green shoots of bullish tendencies but it can't seem to climb the wall of worry to scale the prior peaks. The estimates for Q1 earnings are for a decline of -1.5% to -5.9% for S&P companies. With the major banks reporting this week as well as Intel, SanDisk, Netflix and Google the fear of negative earnings weighed on stocks at the close.

Unless somebody really stinks up the place this week the market should be able to move slightly higher. However, getting out of April without a decline may be a tough challenge. With the dollar still strong and economic reports still weak the sell in May crowd may be making their exits any day now.

The sell in May cycle can be negated by a strong market, strong earnings and positive economics. We have none of those this year. The market may be at its highs but the breadth is shrinking. I have a stock screen of 463 heavily traded stocks. On Monday only 131 of those were positive at the close. Granted the market took a dive in the afternoon on earnings worries but the majority of those stocks with declines were showing negative trending charts.

That makes it hard to find any candidates for selling premium on puts. Since we are selling the May cycle that also means that about 85% of the candidates will report earnings before the May expiration and therefore are not acceptable for selling options.

The play list is heavily weighted with bear call spreads not because I favor that particular strategy but because that is all I have been able to find for the last several weeks. When the market is rising as it did last week the put premiums shrink and there is no reward for our risk in that strategy.

Every strategy has its season and we will continue to play what the market gives us. Let's hope the sell in May crowd is disappointed this year.

We have a lot of April positions expiring this week so be sure to close any remaining ITM positions at Thursday's close as well as any long positions that still have value.

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

KORS - Michael Kors (Stopped)

We were short a May $60 call on KORS but the stock picked last week to rally $3 and stop us out. I don't think the rally is going to stick and I am recommending we reenter the call at the open on Tuesday.

Closed May $60 Call, entry $4.35, exit $6.20, -1.85 loss.

Sell to open May $60 Call, currently $4.60, stop loss $65.85.

TASR - Taser Intl (Close Call)

We have a leftover long call on TASR from a call spread that went bad. The long April $23 call is now worth $3.70 and I am recommending we close it.

Close April $23 call, entry .74, currently $3.70, +2.96 gain.
Previously closed April $20 call, entry $2.28, exit $3.50, -1.22 loss.
Net gain $1.74

PRTA - Prothena (Cancel)

Prothena struggled for a week to break through resistance just under $40 and failed. Shares declined to retest support at $35 and the rebound was lackluster. I am cancelling the recommendation.

Cancel the PRTA covered call recommendation

New Recommendations

APOL - Apollo Education Group (Bear Call Spread)

Apollo warned about declining enrollment as did others in the space. The sector is in decline and Apollo is heading for new two-year lows.

Earnings June 24th.

Sell short May $14 call, currently $2.75, stop loss $18.15
Buy long May $17 call, currently .69, no stop.

BHP - BHP Billiton (Bear call spread)

The mining sector took a serious hit on Monday after Citigroup said iron ore could fall another 20% due to lack of demand from China. Citi said BHP and Rio Tinto Group were pursuing a flawed strategy of boosting output into an already oversupplied market when they should be cutting back on production. Iron ore fell below $50 a ton this month and the federal government is projecting a cost of $35 in May's budget. Citigroup said they could see a decline to $30. UBS and Citi cut the ratings of the miners on Monday and S&P placed the credit ratings of eight iron-ore producers on "credit watch negative." I see new 52-week lows ahead for BHP.

Earnings are August 25th.

Sell short May $40 call, currently $4.30, stop loss $46.15
Buy long May $45 call, currently $1.23, no stop.

LGF - Lions Gate Ent. (Bear call spread)

Lions Gate fell -10% last Wednesday when the company announced a secondary offering of 10 million shares at $32. That was $2 under the share price when the offering was announced. The shares come from the largest LGF shareholder after he had no luck selling them to a strategic investor. Announcing a share offering after JP Morgan was not able to trade them privately was negative for the stock. At the same time the company warned that earnings were trending towards the bottom of their prior forecast. The earnings warning and share sale suggest LGF could retest the February lows at $27.50.

Earnings are May 28th.

Sell short May $28 call, currently $3.10, stop loss $31.85
Buy long May $31 call, currently $1.15, no stop.

NLNK - Newlink Genetics. (Short Put)

Newlink and Merck (MRK) have apparently produced an effective Ebola vaccine. After two early stage trials in the U.S. and four in Africa the vaccine appears to be safe and triggered robust production of Ebola-fighting antibodies. There is currently no vaccine or specific treatment for Ebola and the current outbreak has killed over 10,000 people in West Africa. The vaccine is a cattle virus that has been modified to carry Ebola genes, which trigger production of anti-Ebola antibodies. Currently the vaccine is being tested in a larger trial in Liberia.

Shares are on the verge of breaking out to a new high at $57.

Earnings are May 28th.

Sell short May $45 put, currently $3.20, stop loss $51.75.

New Covered Call Recommendations


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)

AMBA - Ambarella (Short Put)

PRTA - Prothena (Covered Call)

KORS - Michael Kors (Bear call Spread)

NUS - NuSkin (Short Put)

SRPT - Sarepta (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.