The Dow has moved 1,323 points in the last two weeks and nearly 2,000 in the last three weeks. Unfortunately, the moves were not all in the same direction.
Last Monday's low at 17,440 after five days of declines setup a serious short squeeze with the Dow rocketing +343 points higher before stalling out at 17,783 on Friday. Fast forward to today's low at 17,496 and you have a -287 point drop in only two days.
The sudden changes in direction, not only in the broader market but also in the energy market, is killing us. The abrupt changes in the price of crude caused an oversold energy sector to rebound on short covering and that caused us pain as well. It makes me afraid to short anything in this market.
August and September are typically the worst months of the year for the equity market. August is the worst of the two months. The market sold off hard intraday on Monday but a buy program triggered a minor short squeeze at the close to recover half the losses on the Dow and two-thirds on the Nasdaq.
Apple fell into correction territory with a close just above $118 and a technical breakdown below the 200-day average. Apple is one of the six stocks that have lifted the markets to new highs. If Apple continues lower, it could lead to selling in the other five big cap stocks and a significant market decline. However, the market was mixed today despite the negative numbers on the indexes. There were quite a few stocks that finished in the green. The rest of the week could be volatile as well as the rest of the month.
I shudder to add September positions today with what seems like eons of time before expiration. We cannot seem to get a trend that last longer than 3 days. How are we going to get one that lasts 7 weeks?
Send Jim an email
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
SLB - Schlumberger (Stopped)
SLB spiked $2.50 to $84.27 on Wednesday to knock us out of the short call, again. With the energy sector so oversold I am giving up on reestablishing a short position on Schlumberger.
Closed short August $85 call, $1.05, exit $1.25, -.20 loss.
Retain long August $90 call, entry .32, no stop.
Closed 7/23: Short August $86 call, entry $1.44, exit $2.11, -.67 loss.
Closed 7/21: Short August $86 call, entry $1.25, exit $1.70, -.45 loss.
LULU - LuluLemon (Stopped)
The short call on LULU was stopped out again when shares rebounded from $61 to $63.73 last Tuesday. We were snake bit on LULU and SLB and I am not going to try it again.
Closed short August $65 call, entry 69 cents, exit $1.15, -.46 loss
Retain existing August $75 long call, entry 33 cents.
Closed August $70 short call, entry .84, exit .39, +.45 gain.
UCO - Ultra Crude ETF (Stopped)
The spike in crude to $49.50 last Wednesday also took out the short call on the UCO when our stop loss was hit at $29.55. That was the high point for the week.
Closed August $31 call, entry $1.08, exit $1.70, -.62 loss.
Retain Aug $35 long call, entry .43, currently .10
SWKS - Skyworks Solutions (Bear Call spread)
Skyworks supplies components to Apple. With Apple shares plunging the entire Apple food chain is declining. Skyworks declined sharply after earnings but it was not that the earnings were so bad but their reliance on Apple as a customer clouded their outlook.
Skyworks is on the verge of falling below support at $92 that has held since March. Apple broke the same support level today and that suggests Skyworks may follow. I am picking a strike that is nearly $10 OTM so hopefully we can avoid a disaster.
Sell short Sept $100 call, currently $2.25, initial stop $97.35
Buy long Sept $105 call, currently $1.35, no stop.
Net credit 90 cents.
URI - United Rentals (Bear Call spread)
United posted earnings of $1.95 that beat estimates for $1.83 but then warned that lower oil prices were having a negative impact on its tool rental business. They lowered guidance for revenue and earnings.
RBC Capital Markets immediately cut them from a "top pick" to neutral and the shares collapsed from $78 to $64. After moving sideways for a week shares have started to weaken again. If they break that post earnings low we could see a significant decline. Clearly, oil prices are not headed higher and oil patch activity is not growing.
Sell short Sept $70 call, currently $1.45, initial stop $68.35
Buy long Sept $75 call, currently .60, no stop.
Net credit 85 cents.
NSC - Norfolk Southern (Bear Call spread)
Norfolk missed on earnings and revenue because of lower volumes, lower coal shipments, lower shipments to oil fields, etc. It was bad news all around. The stock was cut by Argus from buy to hold and by Barclays from overweight to neutral. Jefferies cut the price target to $85 by Credit Suisse with shares trading at $86.
Sell short Sept $87.50 call, currently .80, initial stop loss $86.15.
Buy long Sept $92.50 call, currently .30, no stop.
Net credit 50 cents.
New Covered Call Recommendations
New Aggressive Recommendations
New Long Term Recommendations
Existing Play Recommendations
Links to original play recommendation
BHI - Baker Hughes (Covered Call)
XOP - Oil Exploration ETF (Bear call Spread)
JOY - Joy Global (Bear call Spread)
LULU - LuluLemon (Bear call Spread)
BOBE - Bob Evans Farms (Put Spread)
SPLK - Splunk (Put Spread)
ZOES - Zoes Kitchen (Covered Call)
GLNG - Golar LNG (Bear call Spread)
SLB - Schlumberger (Bear call Spread)
UCO - Ultra Crude ETF (Bear call Spread)
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.