Picking plays in the middle of the earnings cycle is about as hard as dodging raindrops. Eighty-five percent of companies report earnings in this four-week period.

While I hate to try and find plays in the earnings cycle I am glad it is here because it provides directional candidates for the next two months. I just hope the market cooperates.

While the earnings have been better than expected the bar was very low. Less than 50% of reporters have beaten on revenue and this is the third consecutive quarter of revenue declines.

Guidance warnings are also becoming a problem. On Monday alone 11 companies lowered guidance for Q4 and 16 issued guidance that was in line with previous forecasts. Only 5 companies issued positive guidance out of the 32 that guided today. That is not a very good record and that is an indicator of future market direction if it does not improve.

The companies issuing in line guidance were not winners. Normally just affirming guidance will drag your stock lower. Investors want to see positive growth not stagnant growth.

The companies raising guidance were AVB, CSIA, TREE, TCO and TRIV. You are probably wondering who those companies are. Those giving negative guidance are slightly more recognizable. They included CAKE, CYOU, PCL, TMK, AMKR, UDR, BRX, RCII, RRTS, EXLP and TWOU. In case you do not recognize the symbols the leaders there were Cheesecake Factory, Torchmark and Rent a Center.

The markets did not sell off today and held last week's gains. However, after being flat for six hours the futures fell off a cliff at 10:PM to trade down -5 in only a couple of minutes after the Asian indexes opened sharply lower.

The fiscal year end window dressing should continue the next couple days but fund managers are not going to throw their remaining cash into a declining market. They will hold it instead. The first week of November could see some window undressing as long as Europe and Asia remain unstable. However, with the ECB and BOJ poised to dump more stimulus into the market it could provide a bid for U.S. stocks. Time will tell.

I would not be loading up the truck with new positions just because we are headed into the best six months of the year. I would be patient and see if the market can continue to hold its gains. You might get another buying opportunity soon.

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

BHP - BHP Billiton (Stopped)

BHP dipped just enough to trigger our stop loss at $34.65 before rebounding.

Closed Nov $30 put, entry .73, exit .34, +.39 gain.

QIHU - Qihoo Technology (Stopped/Reenter)

We were stopped out on a dip to $52.85 just before shares rebounded to $56.50. I am recommending we reenter this short put position with QIHU on the verge of a two-month high.

Sell short Nov $50 put, currently .80, stop loss $52.55
Closed Nov $50 short put, entry $1.00, exit $1.95, -.95 loss.

ARWR - Arrowhead Research (Closed)

The stock position on ARWR was closed on Tuesday as recommended.

Expired Oct $7 call, entry $1.20, expired, +$1.20 gain
Closed ARWR shares, entry $7.61, exit $5.18, -2.43 loss
Net loss $1.23.

QUNR - Qunar (Update)

The covered call on QUNR should be golden after the company announced today it was merging with CTRP in a stock swap. QUNR will own 25% of CTRP and CTRP will own 45% of QUNR. Baidu (BIDU) owns 25% of CTRP so the outlook is good. This means less competition and more cooperation along with more business and higher earnings. Goldman upgraded QUNR to a buy with a $48 price target. Shares rallied to $42.50 on the news. Our $35 call is deep in the money.

New Recommendations

UA - Under Armour (Naked Put)

UA reported earnings last week and was knocked for a $10 loss. The rebound on Monday put it back above the Friday highs and suggests it will creep higher. UA did not miss on earnings. They beat on earnings and revenue and raised guidance. The sticking point that reportedly prompted the selling in the stock was an 80 bps drop in gross margin from 49.6% to 48.8% and operating margins fell from 15.6% to 14.2%. The declines were due to the company investing for growth. They guided to a 100% increase in revenue from last year's level to $7.5 billion by 2018. This is a dip to buy.

Earnings January.

Sell short Nov $87.50 put, currently $1.05. Stop loss $90.85.

New Covered Call Recommendations

AAL - American Airlines (Covered Call)

Rising passenger traffic and falling oil prices are a win-win for the airlines ahead of their busy season. American just broke over long term resistance at $44.50 and could be headed for $50 again.

Earnings Jan 22nd.

Buy-write AAL Nov $47 call, currently $46.47-$1.33, stop loss $43.65

QIHU - Qihoo Technologies (Covered Call)

I hate to double up with multiple plays on one stock but the calls were so fat I could not pass it up. With this much premium we have a lot of insurance against another dip.

Earnings Dec 1st.

Buy-write QIHU Nov $54 call, currently $56.22-$3.90, stop loss $52.45

New Aggressive Recommendations


New Long Term Recommendations


Existing Play Recommendations

Links to original play recommendation

BHI - Baker Hughes (Covered Call)

ARWR - Arrowhead Research (Covered Call)

BHP - BHP Billiton (Naked Put)

RH - Restoration Hardware (Naked Put)

DRI - Darden Restaurants (Bear call Spread)

DY - Dycom Industries (Naked Put)

QUNR - Qunar Cayman (Covered Call)

DAL - Delta Airlines (Covered Call)

QIHU - Qihoo Technology (Naked Put)

NFLX - Netflix (Naked 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.