The indexes recovered from an ugly start on Monday after economic news turned decidedly negative. Analysts made up excuses for the NY Manufacturing Survey and investors bought the dip.
The market is now up for two consecutive days. That has not happened since July 29th. While two days does not make a trend there are some bright spots. The Russell came back to life with a +1% gain and the biotechs gained +2.5%. If they continue to stretch those gains the Nasdaq will return as the market leader.
However, option expiration week in August is the most bullish week of the month. The week after expiration is historically bearish.
Normally August and September are the worst months of the year. However, we may have something working for us this time around. The economic reports have been so bad that the Fed will have a really tough time hiking rates in September. The GDP is running at about 1.2% growth for the year and the NY Manufacturing report this morning was the worst since 2009. Q3 GDP is currently showing only +0.7% growth.
Commodities are still in free fall and they will eliminate any signs of inflation. This means the Fed is up a creek without any justification for a rate hike.
If they do not hike in September, the next most likely date is December except that the Fed rarely does anything in December. That pushes them out into 2016. The IMF and ECB have asked the Fed not to hike until 2016.
All of these factors suggest the selling ahead of the Fed meeting on the 16th may be light and should a Fed head make a comment about weak economics and data dependence we could see investors buying the ramp into the meeting with expectations for no hike.
This is all just speculation but that is what is driving the market. In an effort to avoid some of the short-term volatility, I added a couple of longer term Oct/Nov plays this week.
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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
CBI - Chicago Bridge & Iron (Stopped)
The bottom fell out of CBI today on no news. Shares dropped -5% at the open to stop us out at $49.85. Somebody decided they wanted out in a hurry and 800,000 shares traded at the open or 30% of the day's volume. There was no warning and no news.
Closed Oct $45 Put, entry $1.45, exit $1.95, -.50 loss
MNST - Monster Beverage (Stopped)
Everything was looking good until Thursday morning when Monster gapped up and ran for an $8 gain after Morgan Stanley said the pullback was a great buying opportunity and they upgraded the stock to a buy. We were stopped out on the gap higher so we were nailed with a large spike in the premium. "Stuff" happens and we got caught on the wrong side of the headline.
Closed Sept $155 Short call, entry $1.20, exit $2.05, -.85 loss
Retain Sept $165 Long call, entry .45, currently .60
SWKS - Skyworks (Close)
Skyworks declined with Apple and with the yuan devaluation but the stock has firmed and appears to be ready to move higher. I am recommending we exit the short call and keep the long call open. If the stock does breakout we could actually do really well on the long call.
Close Sept $100 short call, entry $1.79, currently $1.29, +.50 gain
Retain Sept $105 long call, entry $1.00, currently .50
GPRO - GoPro (Unopened)
GoPro did not breakout and reach the entry trigger at $65.85. The play was unopened and is now cancelled. Shares crashed with the yuan devaluation.
NFLX - Netflix (Short Put)
Netflix refuses to decline. With new original content in other languages they are pursuing their goal of global domination in the streaming arena. Since the new highs in early August shares pulled back to $120 in a very bad market and held at that support level. I am recommending a short put $5 below that support.
Earnings are Oct 14th.
Sell short Sept $115 put, currently $2.08, stop loss $118.85
New Covered Call Recommendations
New Aggressive Recommendations
New Long Term Recommendations
SWKS - Skyworks (Put Spread)
Skyworks is recovering from the Apple crash. Apple is their largest customer and shares of SWKS declined in sympathy when Apple fell into correction territory. Shares have recovered from support at $85 and are attempting to move higher. Resistance at $91.50 is the next challenge.
I am recommending a November put spread and we will exit before earnings.
Earnings are Nov 5th.
I want to make sure SWKS breaks over resistance before we enter this position. Enter the position only with a SWKS trade at $93.25.
With SWKS trade at $93.25
Sell short Nov $80 put, currently $3.80, stop loss $84.85
Buy long Nov $70 put, currently $1.75, no stop.
Net credit today of $2.05. That will change before entry.
UA - Under Armour (Short Put)
Under Armour is making headlines almost daily as it steals market share from Nike and Adidas. Formerly just a sports underwear company it now offers a full line of sports apparel including shoes. Recently they broke into the NBA with multiple contracts formerly held by Adidas. UA consolidated after its post earnings spike and held its ground during the rough market over the last two weeks. Today it closed at $101 and on the verge of breaking out to a new high.
UA also has a 2:1 split coming up in the next several weeks. The date will be announced after the board meeting on August 26th. This should also power the stock higher.
Earnings Oct 22nd
With a UA trade at $101.25
Sell short October $95 put, currently $2.25, stop loss $98.45
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)
ZOES - Zoes Kitchen (Covered Call)
GLNG - Golar LNG (Bear call Spread)
UCO - Ultra Crude ETF (Bear call Spread)
SWKS - Skyworks Solutions (Bear call Spread)
URI - United Rentals (Bear call Spread)
NSC - Norfolk Southern (Bear call Spread)
CBI - Chicago Bridge (Short Put)
GPRO - GoPro (Short Put)
MNST - Monster Beverage (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.