Will the last seasonal December trend prove true or false? The rest of the December trends failed horribly.

In theory, the Santa rally is the last five trading days of December and the first two trading days of January. In recent years that rally has failed to appear or was weak at best. It was also followed by declines in January for the last two years. The three years prior to that saw huge gains in January.

We cannot plan our trades on historical trends but we can be aware of those trends. Give the weakness in 2015 we could be looking at a third consecutive decline in January. Investors with gains that did not want to pay taxes for 2015 wait to sell in January. That may be a good sign since very few investors actually had gains in 2015. That means there might be very few selling in January.

We have been bounced around so much over the last five months and especially the last three weeks that I am hesitant to add too many plays until we see what January brings. I have posted the chart below more than once in the Option Investor commentary and it shows that the last week of December has not been positive early and then faded in the last two days of the year. The last two years that led into the January decline.

The blue small cap line is not happening this year. The small caps are in the tanks and treading water above two-month lows. Without the seasonal strength in the small caps the big cap stocks may remain lethargic.

I recommend we remain cautious until a trend develops in either direction.

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

CLB - Core Labs (Stopped)

Core Labs was spiking on no news when i added the play last week. That spike did not last long when oil prices collapsed and fell back to seven-year lows. Core declined -$15 in two-days on no news to stop us out at $110.50 for a big loss. The market imploded over the last two days of last week with the Dow losing -680 points from its high. This caused profit taking in any stock that had profits to take and Core qualified.

Stopped Jan $105 put, entry $1.47, exit $2.90, -1.43 loss.

BHI - Baker Hughes (Dropping)

We added Baker Hughes as a covered call play a year ago and did pretty good on the two calls we sold. Then Halliburton announced it was merging with BHI for what would have been another nice gain in the BHI shares we were holding. The continued decline in oil prices weighed on both stocks and now they have postponed the deadline for DOJ approval for the third time. April 30th is now the date. If the deal cannot close BHI gets a $3.5 billion breakup fee. If it does close the current value of the deal is $56.41 or about $12 over today's close. I believe if the deal gets approved the price of Halliburton will rise and so will the price of BHI shares. The deal is structured for BHI shareholders to get 1.12 HAL shares plus $19. If HAL shares rise then the value of the deal rises.

The drop from $55 in BHI shares over the last two weeks on the news of the approval delay has put us back into a negative position.

If it closed today at a net of $56.41 we would be down -573.20 on the position. It would not take much of a gain in HAL shares to make up that difference. However, I have carried this position far too long in the portfolio. While I am not recommending that anyone still holding it rush out and sell, I am dropping it from the portfolio after today. New readers don't understand how we got here and it is confusing to them because it is not a simple play.

BHI shares, entry $66.02, current value of HAL offer $56.41, -9.61 loss
Previously closed Jan $67.50 short call, entry $2.65, exit .27, +2.38 gain
Previously closed Apr $62.50 short call, entry $2.30, exit .80, +1.50 gain
Net loss as of today's close = -$5.73

New Recommendations

AMBA - Ambarella Inc (Put Spread)

Ambarella reported earnings on Dec 4th and lowered guidance as a result of lower than expected demand from GoPro. Shares dropped sharply and then recovered after a week of volatility. They are moving slowly higher as the company discusses deals with other vendors and proves it is not reliant on GoPro. Shares have resistance at $60 and they touched that on Monday. I am recommending a put spread well under the December low.

Earnings March 3rd.

Sell short Jan $52.50 put, currently $1.55, stop loss $54.85
Buy long Jan $45 put, currently .40, no stop loss
Net credit $1.15

New Covered Call Recommendations

SRPT - Sarepta Therapeutics (Covered Call)

Sarapeta announced that the FDA will review their muscular dystrophy drug on January 22nd. That is 7 days after the January options expire. That created an event horizon that increased the value of the options but will not occur until after expiration. That should keep the stock inflated as well. SRPT shares have failed to decline materially over the last several weeks in a bad market. They are holding steady at $38. I am recommending the $40 calls because the $38 calls do not have a lot of volume and the bid/ask spread is wide.

Earnings Feb 4th.

Buy write SRPT Jan $40 Call, currently $37.85-$2.30, stop loss $33.85
Gain if called $4.45

Original Play Recommendations (Alpha by Symbol)

CLB - Core Labs (Short Put)

Core Labs took off like a rocket in the middle of the day to gain nearly $4 on no news. With all the major analysts recommending energy for 2016 this may have been fund managers getting a head start OR there is something going on that we do not know about like a pending acquisition announcement. There was another big gain on the 9th on no news.

I am recommending the $105 put and that would be under the December low.

Sell short Jan $105 put, currently $1.90, stop loss $110.50

LRCX - Lam Research

Lam has been one of the most stable stocks in the market for the last two months. The company is paying out a 30 cent dividend and Dec 9th was the ex dividend date so the post dividend depression has passed us. Shares declined on Fri/Mon for no reason and I suspect it was related to tax loss selling. Somebody had to sell their winners to offset their losers.

Lam is buying KLAC for $10 billion and analysts love the combination. Earnings are January 27th and we have time for one more short put on this stable stock. I hope I did not jinx it by calling it stable.

Sell short Jan $72.50 put, currently $1.05, stop loss $75.75

RTRX - Retrophin (Put Spread)

Retrophin is another biotech stock seeking to develop drugs to fight rare diseases. Last Monday the company received orphan drug designation for Sparsentan, a drug to treat focal segmental glomerulosclerosis. Previously the FDA had also approved that designation. Being designated an orphan drug carried regulatory and financial incentives to continue developing the therapy. When the drugs come to market they typically carry a high price tag.

Retrophin has been basing at $18 for the last two months and has begun to move higher over the last week. The put spread I am recommending is the 17.50/12.50 for 50 cents. The 17.50 level is the recent support.

Earnings are Feb 2nd.

Sell short Dec $17.50 put, currently .75, stop loss $18.65
Buy long Dec $12.50 put, currently .25, no stop
net credit 50 cents.

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.