Fear of the Fed is weighing on the markets and volatility is evaporating. The intraday range on the Dow was the slimmest since August 18th.
The debate over hike or no hike is paralyzing investor sentiment. Nobody has a clue for direction after the Fed announcement on Thursday. Typically the first rate hike in a cycle causes a 3% to 5% decline in the markets. However, this one has been so widely predicted that the market has already declined more than that in advance of the event. In theory, the rate hike is already priced into the market.
However, if the Fed does not hike then investor will begin to worry about what the Fed sees that we do not see. The market could actually decline if there is no rate hike.
This uncertainty has paralyzed the markets and the S&P is hugging the flat line at 1,950 and that could continue to be the center of our trading range until Thursday afternoon.
Fortunately, that is good for us. All of our current positions are bleeding premium and six of them expire on Friday. We would rather not see a huge market bounce ahead of expiration. Shorts would be squeezed hard and there could be some stop outs.
The VIX options expire on Wednesday and that is good since volatility could spike significantly after the Fed announcement on Thursday. The VIX position should expire worthless. I considered closing it today but decided to let it run. The VIX is $24 and we are short the $30 call.
If the market rallies after the Fed announcement, it could remain in an upward trend into December. That would be the ideal result since a directional market would be a lot easier to trade than the crazy market we have had over the last several months.
The next challenge after the Fed is a possible government shutdown as we near month end. That did not work out well in October 2011 and I would rather not go through that again. The market crashed hard during that last event. The S&P lost -250 points in about ten days.
I am hoping the Fed hikes rates and guides for the next hike well into 2016. That would remove the uncertainty from the market and allow a rally to begin. Historically, when the Fed hikes rates the first time the market dips on the announcement but rises about 10% over the next 12 months.
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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
NSC - Norfolk Southern (Stopped)
The drop in oil prices gave transports a boost and NSC spiked to $80 on Tuesday to stop us out of the short side for a nice gain. Assuming nobody acquires NSC between now and Friday the long side will expire worthless.
Closed Sep $87.50 short call, entry .75, exit .15, +.60 gain
Expiring Sept $92.50 long call, entry .25, expiring, -.25 loss
Net gain 35 cents.
OXY - Occidental Petroleum (Call Spread)
Occidental is an often overlooked oil company with operations in the U.S. and the Middle East. They recently split off their assets in California because of the hassle of dealing with the state government. Drilling permits and environmental rules were always a struggle. The remaining company operates in the various shale plays and should be a decent portfolio position if this was a regular oil market. OXY has been relatively quiet while everyone else is cutting capital expenditures and reducing rig counts. Their turn in the spotlight could be just ahead.
Earnings Oct 22nd.
Sell short Oct $70 call, currently $1.07, stop loss $68.65
Buy long Oct $75 call, currently .28, no stop loss
Net credit 79 cents.
QIHU - Qihoo Technology (Call Spread)
Qihoo is a technology company in search of a mission. Originally they were a market leader in free antivirus software. To monetize this they launched ad sponsored, cloud based security products, web browsers, virtual goods bought in online games, etc. They launched So.com, the second largest search engine in China behind Baidu. For a while business was good. Advertising revenue from search engines, portal sites and security products, rose +72% annually last quarter but that was down from the prior two quarters at 75% and 89%.
Revenue from value added services declined -16%, compared to +140% growth a year earlier. The culprit was the suspension of online lottery operations. The number of daily clicks from the start page and sub pages fell -10%.
Qihoo is trying to find a niche that will consistently make money. In China that is hard to do. Shares closed at a new 52-week low on Monday.
Earnings December 1st.
Sell short Oct $47.50 call, $1.65, stop loss $46.35
Buy long Oct $55.00 call, currently .50, no stop
Net credit $1.15
QCOM - Qualcomm (Call Spread)
Despite weekly headlines of some new chip, Qualcomm can seem to find any buyers. Shares are on the verge of breaking below support at $54 and moving to a new 52-week low. They announced the acquisition of Capsule Technologies on Monday and while that should help them long term it will weigh on the stock price in the short-term.
Earnings Nov 4th
Sell short Oct $57.50 call, currently .64, stop loss $55.85
Buy long Oct $62.50 call, currently .11, no stop.
Net credit 53 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)
SWKS - Skyworks Solutions (Bear call Spread)
URI - United Rentals (Bear call Spread)
NSC - Norfolk Southern (Bear call Spread)
MNST - Monster Beverage (Bear call Spread)
$VIX - Volatility Index (Bear call Spread)
XOP - Oil Exploration ETF (Bear call Spread)
EOG - EOG Resources (Bear call Spread)
TIF - Tiffany (Bear call Spread)
UAL - United Continental (Put 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.