Traders want to know if we have reached a bottom after the Dow and S&P actually finished with a gain on Monday.

Unfortunately, there is no way to know until the market tells us. The afternoon rebound appeared to be a buy program and that is encouraging since there has not been any in 2016. However, the minor bounce into positive territory was immediately sold and the Nasdaq declined more than 26 points from the afternoon high to lose -6 for the day.

In any prolonged sell off there can be multiple short-term rallies. Everyone gets so bearish that the least little thing triggers some short covering. When the rebound does not stick the weak sellers return to ride the coattails of those pushing the market lower.

I would not call today's bounce short covering. While it was rapid and occurring over about a 20 min period there was zero follow through suggesting nobody was actually covering their shorts. You know the kind of short squeeze I am talking about. With the Dow down -1,500 points in the last 8 days we should get a rip roaring squeeze that runs for 200-300 points and closes at the highs of the day. Having the Dow close up +50 points was not a squeeze or a rally. It was just a buy program.

We have one of those monster short squeezes in our future. Whether it is tomorrow or in the days ahead it will be there. The indexes are so oversold that once the selling pressure eases all the existing shorts will begin to get nervous. Any good news at all can trigger a squeeze at that point.

Volume has been very high and averaging nearly 9.0 billion shares for the last four days. Internals actually improved a little on Monday with decliners only 2:1 over advancers.

The Chinese markets are flat as I type this. They opened up +1.0% then declined -0.7% in the first ten minutes then went dormant. With the Shanghai Composite right on the edge of a major breakdown in the chart below, I suspect the calm is temporary. Would you buy that chart if it was a stock?

Futures have been down as much as -6 and up as much as +5 and are flat as I type this. If the Chinese markets finish with any minimal gain we could see an attempt to buy stocks in the U.S. markets. If that attempt to rally ends with a bloody nose then we can expect a further decline in the days ahead.

The S&P bounced off 1,900 today and that probably gave some traders an excuse to buy. We closed at 1,923 with a gain of 1 point so there was a little dip buying.

I am very hesitant to add any direction positions in either direction. December volatility was a nightmare with strong moves in both directions more than once. If a bottom does form above 1,900 at least that should give us a base to move higher over the next couple of months until the Sell in May crowd starts to get nervous.

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

AMBA - Ambarella (Closed long)

When Ambarella collapsed last week on the GoPro decline I recommended we close the long put. Unfortunately, Ambarella continued to decline a lot.

Closed Jan $45 long put, entry .30, exit .45, +.15 gain

IWM - Russell 2000 ETF (Closed Long Put)

Last week I recommended we close the long put on the IWM. Unfortunately Tuesday was the only day of the week that gapped open so the value of the put shrank significantly before the Russell rolled over and the ETF lost another 5 points.

Closed Jan $103 long put, entry .08, exit .65, +.57 gain.

SRPT - Sarepta Therapeutics (Stopped)

After holding the flat line for three weeks the biotech implosion finally caught up with SRPT. Shares dipped at the open on Thursday ot stop us out and then crashed today when the sector lost -4%.

Closed SRPT shares, entry $37.92, exit $34.85, -3.07 loss
Closed Jan $40 call, entry $2.10, exit .54, +1.56 gain
Net loss -1.51

New Recommendations

PVH - PVH Corp (Call Spread)

PVH, a designer of branded shirts, ties and sportswear, posted disappointing earnings for the third consecutive quarter and then provided weak guidance for the full year. Zacks downgraded them to a "strong sell" and shares are in dive mode following the earnings. With other retailers also reporting weak results for December the outlook for PVH is not good.

Earnings Mar 23rd.

Sell short Feb $75 call, currently $1.25, stop loss $73.25
Buy long Feb $80 call, currently 55 cents, no stop loss
Net credit 70 cents.

GME - Gamestop (Naked Put)

Gamestop ended the year with more than 1,000 technology stores. Analysts have tried to write off this company for the last couple years but they keep coming up with new reasons to believe in them. The company is moving beyond just selling games to selling all kinds of electronics and wireless phones. They now operate 76 Simply Mac stores, 857 AT&T stores, 71 Cricket stores making them the largest AT&T authorized retailer and the largest Apple-authorized specialist. The revenue from the technology branded stores rose +64% in Q3. They also own more than 6,900 video game stores in14 countries.

They halted a long decline when they closed on the last acquisition in early December. Shares went sideways at $28.50 for a month. They were downgraded by Sterne Agee on the 4th and shares dropped at the open but finished the day back at $28.50. On Monday shares spiked +3.5% to $29.36 on no news. I am proposing a short put under that January low.

Earnings Mar 24th.

Sell short Feb $27 put, currently $1.00, stop loss $27.65

New Covered Call Recommendations


Original Play Recommendations (Alpha by Symbol)

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

IWM - Russell 2000 ETF (Put Spread)

This is a low dollar spread with the IWM at $114. Typically the Russell is the strongest index for the next three weeks. Unfortunately, seasonal trends have not worked out well this year. However, the Russell is trying to put in a higher low and the ETF was down only fractionally today. I tried to get as far out of the money as possible because there is always some volatility around the first of the year.

IWM 108/103 37/12 cents

Sell short Jan $108 put, currently 37 cents, stop loss $110.85
Buy long Jan $103 put, currently 12 cents, no stop.
Net credit 25 cents.

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

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.