The Volatility Index may be rising but at a snail's pace. The market decline has pushed the VIX back up to 15 but that is hardly a reason to get excited.

The VIX has crept back up from 12 to 15 over the last two weeks but the pace has been so slow the option premiums have not inflated enough to keep pace. Nobody expects this market decline to continue but they are not betting against it either.

Volume was weak at 5.5 million shares on a down day. This suggests there is no abundance of sellers but buyers were not charging into the market either. The Dow closed at a two month low but only about -500 points off its high. That is about -3.2% from its high. Except for October last year every 3-5% dip has been bought. It appears traders are expecting that to happen this time as well.

The small caps are not participating in the sell off and that produces an underlying dose of bullish sentiment. Unfortunately having the Dow close on the low of the day is hardly bullish so we have a serious bout of uncertainty on our hands.

I fear we are approaching a short squeeze in the coming days. Whether that will have any staying power is of course unknown.

I am taking the slow approach on adding new plays given the uncertainty. Obviously in a down market we can't be adding a bunch of short puts so the safest alternative is the bear call spread on stocks that are already declining. "Safest" is a relative term in an uncertain market.

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

GPRO - GoPro (Close)

GoPro refuses to decline but should the market weaken further the big gainers will eventually crash. The short put has declined to only 10 cents and I am recommending we close the position to reduce our risk.

Close June $47 put, entry .75, currently .10, +.65 gain.

CLDX - Calldex (Stopped)

Celldex rolled over after three weeks of gains after some headlines at the cancer conference. There was nothing specifically wrong with Celldex but there was good news from a lot of other small firms. We were stopped out on the drop at $27.25.

Closd CLDX shares, entry $27.83, exit $27.25, -.58 loss
Closed June $28 short call, entry $1.85, exit .65, +.75 gain.
Net gain +17 cents.

CYH - Community Health System (Stopped)

The Journal of Health Affairs published a study on Monday showing the 50 hospitals with the highest price markups over actual cost. In many cases it was more than 1,000%. Of the 50 hospitals 25 were owned by Community Health Systems. Since very few people actually pay the list price for a procedure the hospital is not really making 1000% on their services but the report was viewed with a negative context. Shares fell -2.5% at the open to stop us out at $44.35.

Closed July $50 short put, entry $1.40, exit $1.85, -.45 loss

New Recommendations

NSC - Norfolk Southern (Bear call spread)

Norfolk is crashing and there is little on the horizon to end the decline. The railroads are being hurt by the decline in activity in the energy sector. They were shipping thousands of carloads of frac sand and well pipe but active rigs have declined by more than 60%. Coal shipments are also declining because natural gas prices are so cheap and President Obama has declared a war on coal. About 25% of coal fired electrical plants will be shutdown over the next three years.

Earnings July 29th.

Sell short July $95 call, currently $.80, stop loss $94.15
Buy long July $100 call, currently .20, no stop.
Net credit $.60

Z - Zillow (Bear Call Spread)

Rising interest rates and the passage of the spring buying season has put Zillow shares into a dive. The company posted better than expected earnings but revenue was light. Guidance was for $3.5-$4.5 million EBITDA for the current quarter and analysts were expecting $14 million. Shares are plunging as we move out of the home buying season and into summer. Typically homes are bought in April/May with plans to move when kids get out of school. Sales slow as the summer progresses.

Earnings August 11th.

Sell short July $95 call, currently $1.60, stop loss $93.65
Buy long July $105 call, currently .45, no stop
Net credit $1.15.

New Covered Call Recommendations


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)

CLDX - Celldex Therapeutics (Covered Call)

AAL - American Airlines (Bear Call Spread)

CYH - Community Health (Short Put)

HLF - Herbalife (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.