The market posted minor gains last week and could be poised to set new highs again next week. In the scary movies the audience is always worried about what may behind that next door. Should we be worried about next week?
When a market makes new highs on the lowest volume of the year we should worry. While the market picture may appear to be placid, like a duck on a pond there is a lot of furious paddling going on under the surface. Analysts are changing their outlooks in large numbers. Goldman says no gains for the rest of the year and Merrill Lynch says it is time to buy stocks. Investor sentiment has reached the highest neutral level in years at 49%. Bullish and bearish sentiment continues to decline to only 25% each. Nobody knows where the market is going.
What is wrong with this picture? We were not stopped out of anything last week. I have not been able to say that in a long time. The market has gone from high volatility with large swings to no volatility at all last week. The VIX hit its low for the year at 11.82. When the VIX is low it is time to go or so the saying goes. However, the VIX can stay obscenely low for weeks on end before the eventual spike back to ridiculous levels.
Note that the last several touches of the 12.00 level on the VIX were followed by some significant spikes. In December the S&P lost -107 points in 7 days. In Sept/Oct the S&P dropped -189 points in 4 weeks.
Since the Dec/Jan volatility the market has been essentially flat with the first five months of 2015 the lowest range on the Dow in over 100 years. The odds are very good there is going to be a market event in our future.
In my weekend Option Investor commentary I suggested we could be approaching a positive June because of high cash positions in funds, the highest since 2009, and the coming end of the quarter/half. Fund managers need to do something with that money before they print those midyear statements at the end of June. We could see some month long window dressing.
I am expecting any dips to be bought until July. Once past the end of the first half all bets are off as we head into the August-October ugly season.
S&P futures are down -4.50 as I write this at 8:30 on Monday night. Whether that will hold, get worse or rebound before Tuesday's open is anybody's guess. I learned a long time ago not to count on market direction based on the S&P futures the day before.
We hit a home run on Sarepta (SRPT) with the company releasing some FDA data last week and the stock spiked +$10. That covered call is not coming back.
The problem with the VIX falling to 12 and volume hitting a low for the year is the complete lack of option premiums. Both of those things contribute to lower premiums and with four weeks left in the June cycle it was slim pickings this weekend. With market direction uncertain it is probably best not to load up on plays.
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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 Position Changes
AAL - American Airlines (call spread)
The bottom fell out of the airline sector last week with news that some discount carriers will be increasing capacity and adding additional flights. That pushes ticket prices lower as airlines compete for the available passengers. American's CEO said "We will compete aggressively on price" and that helped tank the entire airline sector. The magnitude of the declines were stunning. United fell -$10 to $53. American fell -7 to $42. With oil prices expected to rise in the coming weeks there will be a continued headwind for the airline sector.
Earnings July 23rd.
Sell short June $45 Call, currently .74, stop loss $44.35
Buy long June $48 Call, currently .23, no stop.
Net credit 51 cents.
New Covered Call Recommendations
CLDX - Celldex Therapeutics
Reported earnings that were better than expected and updated investors on the drugs in their pipeline. The information was warmly received and shares have moved higher ever since. On May 13th they released some data from a phase 1/2 study CDX-301 and CDX-110 at the American Society of Clinical Oncology meeting in Chicago. That data was also positive. Shares are recovering from the second biotech wreck in late April.
Earnings July 29th.
Buy-write CLDX June $28 call, currently $27.84-$2.15, stop loss $25.25
Gain if called $2.31
New Aggressive Recommendations
New Long Term Recommendations
Existing Play Recommendations
Links to original play recommendation
BHI - Baker Hughes (Covered Call)
NOW - ServiceNow (Bear call Spread)
PRLB - Proto Labs (Bear call Spread)
GPRO - GoPro (Short Put)
OLED - Universal Display (Short Put)
SRPT - Sarepta Therapeutics (Covered Call)
RDUS - Radius Health (Covered Call)
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.