It is that time of the quarter again where the vast majority of stocks report earnings over the next four weeks. That gives the market something to digest and volatility increases.
Unfortunately, it also makes adding new positions a challenge because we do not want to hold over an earnings event. The rally from the last two weeks has pumped up the call premiums but we do not know if it is going to continue.
The S&P closed at 2,017 and just under resistance at 2,020. That will give the bulls something to target if we get a continued rally on Tuesday. The Dow has put together a streak of seven consecutive days and as we all know those streaks will eventually end and sometimes end badly.
I think we are due for some profit taking and then the market will choose a direction based on earnings. Currently Q3 earnings are expected to decline -5.3% and revenue decline -1.5%. Q4 guidance has been cut significantly from an expected +12% rise in earnings to -1.4% today. The majority of guidance updates over the last two weeks have been negative. That suggests we could have some rocky earnings.
However, many times what appears to be a dreadful earnings cycle actually turns out to be positive for the market if the earnings are not as bad as predicted. Hopefully that is what we will see this quarter.
With the Fed on hold until at least December and probably March, the market is free to move without the ever-present rate hike cloud. The next two weeks "should" be positive if is up to fund managers. They only have two weeks to window dress their portfolios for the fiscal year end on October 31st. They should be trying to "buy" performance over the next two weeks. That means the winners should continue to win as managers jump on for the ride.
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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
EOG - EOG Resources (Close)
The energy sector soared last week on short covering over Russia entering Syria. Today the sector declined -3%. I am recommending we close the long call on EOG.
Close Oct $87.50 Long Call, entry .57, currently .55, -.02 loss.
Previously closed Oct $82.50 short call, entry $1.59, exit $1.30, +.29 gain.
Previously closed Oct $82.50 short call, entry .41, exit .41, zero gain
Net gain 27 cents.
OXY - Occidental Petroleum (Close)
The energy sector soared last week on short covering over Russia entering Syria. Today the sector declined -3%. I am recommending we close the long call on OXY.
Close Oct $75 long call, entry .27, currently .20, -.07 loss
Previously closed Oct $70.00 short call, entry .58, exit .50, +.08 gain
Previously closed Oct $70.00 short call, entry $1.22, exit $1.65, -.43 loss
Net loss -42 cents.
LVS - Las Vegas Sands (Closed)
Last Monday I recommended we close the long call because I doubted LVS would rebound much farther on the prior week's news. I was wrong and LVS rallied another $2.
Closed Oct $50 long call, entry .12, exit .08, -.04 loss
Previously closed Oct $47 short call, entry .44, exit .30, +.14 gain.
Net gain 8 cents.
DRI - Darden Restaurants (Call Spread)
Darden beat on earnings on Sept 22nd and rallied to $72. Unfortunately it has been downhill ever since. The chain is considering a spinoff of its real estate into a REIT and investors are not excited about the prospect.
Earnings Dec 15th.
Sell short Nov $70 call, currently .90, stop loss $68.65
Buy long Nov $77.50 call, currently .30, no stop loss.
Net credit 60 cents.
DY - Dycom Industries (Naked Put)
Dycom manages the installation and placement of fiber optic cables, coax and copper cables for the telecomm industry. They offer tower construction, installation, maintenance. They also maintain customer equipment like digital video recorders, set top boxes and modems for cable television systems.
Shares have been moving higher after declining with the market in late September. They closed right at a 52-week high on Monday.
Sell short Nov $70 Put, currently $1.20, stop loss $73.55
New Covered Call Recommendations
QUNR - Qunar Cayman (Covered Call)
Qunar operated an online travel commerce platform in China. They provide airline tickets, hotels, vacation packages, car rentals, train tickets and tickets to local attractions. Last week they announced a partnership with Starwood Hotels (HOT) to market their 1,200 properties. Qunar has a large client base of high net worth customers that will be immediately interested in the Starwood resort properties. Shares spiked on the news and continue to climb.
Buy-write QUNR Nov $35 call, currently $36.32-$3.20, stop loss $32.35
This call offers nearly $2 of insurance against a stock decline.
New Aggressive Recommendations
New Long Term Recommendations
Existing Play Recommendations
Links to original play recommendation
BHI - Baker Hughes (Covered Call)
EOG - EOG Resources (Bear call Spread)
TIF - Tiffany (Bear call Spread)
OXY - Occidental Petroleum (Bear call Spread)
QCOM - Qualcomm (Bear call Spread)
LVS - Las Vegas Sands (Bear call Spread)
ARWR - Arrowhead Research (Covered Call)
BHP - BHP Billiton (Naked Put)
LEN - Lennar (Naked Put)
RH - Restoration Hardware (Naked Put)
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.