The combination of window undressing and a serious smack down in the retail sector knocked the markets to a four-week low.

The worries over the retail sector and how a slowing consumer would impact the economy in general knocked the S&P from 2,099 at the beginning of the week to 2,023 at the close on Friday. The Dow lost -665 points after the retail earnings and the retail sales report for October came in weaker than expected.

The worries over a weak consumer, which is 65% of our GDP, caused worries about a weak economy both in the U.S. and abroad. Recession talk was making the rounds and the market sank.

Volume was only moderate and the real weakness was confined to a lot of the momentum favorites that had been at recent highs. This had all the signs of a normal window undressing trade where fund managers unloaded the winners they picked up in October to make their portfolios look good on the fiscal Oct 31st year end.

Today's rebound was encouraging after the Paris attacked failed to depress the market. However, I fear most of it was short covering. The bounce came right at strong support at 11:30 in the morning. It appeared they tried to push the markets lower at the open and when that did not work, the short covering began.

I said in the Option Investor weekend commentary that the only thing that could rescue the Dow from further declines was a good short squeeze because the charts for each of the Dow 30 looked terrible. Thank goodness for short squeezes because this one came right on time.

I have no prediction for the rest of the week. The candle for Monday was a "bullish engulfing" candle, which normally indicates a market reversal BUT short squeezes can produce those and sometimes they turn into one-day wonders.

I am recommending we buy the dip as long as the S&P remains over 2,023. However, I only added two plays tonight just in case there is another reversal in our future.

Jim Brown

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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

NFLX - Netflix (Closed)

Netflix was closed last Tuesday since the option had deflated and it was not worth keeping the risk open. That turned out to be the right call since Netflix crashed back to $102 at the open this morning before rebounding nearly $8. Our $90 put would not have been in any danger but the premium would have spiked.

Closed Nov $90 put, entry $1.71, exit .21, +$1.50 gain

URI - United Rentals (Stopped)

Shares of URI dropped sharply on Thr/Fri and stopped us out at $75.25. The put premium spiked on the drop and we exited with only a minor gain.

Closed Nov $72 put, entry $1.10, exit .80, +.30 gain

DAL - Delta Airlines (Stopped)

The airline sector rolled over last week and even lower oil prices could not hold them up. The weak retail numbers convinced investors that consumers might not be spending money on airfare this holiday season. The Paris attacks knocked them even lower today.

Closed DAL shares, entry $50.32, exit $49.25, -1.07 loss
Closed Nov $49 call, entry $2.30, exit .84 +1.46 gain.
Net gain 39 cents.

AAL - American Airlines (Stopped)

The airline sector rolled over last week and even lower oil prices could not hold them up. The weak retail numbers convinced investors that consumers might not be spending money on airfare this holiday season. The Paris attacks knocked them even lower today.

Closed AAL shares, entry $46.42, exit $43.85, -2.57 loss
Closed Nov $47 call, entry $1.24, exit .11, +1.13 gain
Net loss 1.44

QRVO - Qorvo (Not Opened)

QRVO was at $54.09 when I recommended the play last week. It gapped down to $51.39 at the open on Tuesday morning. As previously explained we do not want to enter plays with gaps of more than $1 on the morning following the recommendation. News headlines happen and as thinking individuals we can elect not to enter a recommendation where a news headline has dramatically impacted the price.

New Recommendations

FIT - Fitbit (Short Put)

Fitbit was crushed last week in a market related dive and they announced a 21 million share secondary at $29. Originally it was to be 7 million company shares and 14 million shareholder shares. That was downsized over the weekend to 3 million company shares and the same 14 million shareholder shares. The stock rallied on Monday after Suntrust reiterated a buy rating and said the decline was overdone. The analyst said Fitbit was suffering from the weak pricing on the Square IPO, the drop in GoPro, the weak retail sales numbers and the weak market rather than a company specific headline. If they are successfully selling 17 million shares at $29 the stock should not decline to $25.

The company reported earnings on Nov 3rd of 24 cents that more than doubled the 10 cents expected. Revenue of $409.3 million also beat estimates for $360 million. They also guided higher for the current quarter and above analyst estimates on both earnings and revenue.

Earnings Jan 28th.

Sell short Dec $25 put, currently $1.10, stop loss $26.45 which would be a new low.

UA - Under Armour (Put Spread)

Under Armour was crushed last week on the retail weakness. It had nothing to do with their business but worries over retail in general. Under Armour and Nike are nearly immune to the weakness because they sell into the "athleisure" space, which is not affected by the Walmart shopping crowd living paycheck to paycheck. I believe UA will recover quickly from the retail massacre.

Earnings Feb 3rd.

The spread is wide because we are using stop losses to limit out liability and the wider spread gives us a higher net credit.

Sell short Dec $85 put, currently $2.10, stop loss $86.65
Buy long Dec $70 put, currently .35, no stop loss.
Net credit $1.75

New Covered Call Recommendations


Existing Play Recommendations

Links to original play recommendation

BHI - Baker Hughes (Covered Call)

DRI - Darden Restaurants (Bear call Spread)

QUNR - Qunar Cayman (Covered Call)

DAL - Delta Airlines (Covered Call)

QIHU - Qihoo Technology (Short Put)

NFLX - Netflix (Short Put)

AAL - American Airlines (Covered Call)

QIHU - Qihoo Technologies (Covered Call)

ABMD - Abiomed (Short Put)

URI - United Rentals (Short Put)

LRCX - Lam Research (Short Put)

CEMP - Cempra (Covered Call)

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.