Option expiration is behind us and China's economics were neutral. China's markets are positive and oil even found a bid. Is the craziness behind us?
I am a long way from calling a market bottom and the futures have been all over the map tonight. They are up +15 while I am typing this at midnight. That may be good for a relief rally but it remains to be seen if the bears are ready to run back to the forest or regroup and charge back into the fight.
The markets are very oversold and already in correction territory since the December 29th high. Sometimes that dip to -10% is all they need for investors to check "correction" off their list and start buying again. But then again, sometimes it is just another plateau on the way down to a lower low.
The Dow held at 16,000 and the S&P dipped to the August lows at 1,867 and rebounded. Those are decent support levels and they could be defended as long as the headlines are neutral.
Crude has been the anchor on the market and Brent traded down to $27.67 over the weekend after the Iranian sanctions were lifted. However, WTI dipped to $28.36 before catching a bid and rebounding slightly to $29.38 tonight. I fully expect WTI to trade down to $25 in the weeks ahead so any short-term bounce is just short covering or profit taking. This will produce a longer-term drag on the market but as long as the decline is slow the market impact should be minimal. It is when crude takes those 5% dips in a single day as it did last week that market trauma appears.
If I were going to predict the market for this week, I would expect an attempt to rally on Tuesday and possibly a retest of Friday's lows. That retest, if it occurs, will be the key to the rest of the week.
Caution remains the keyword for the week. You do not have to trade. Being bored is better than being broke.
Send Jim an email
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.
Monthly Cash Machine
Current Position Changes
GME - GameStop (Stopped)
Gamestop collapsed last week after the company warned on Q4 earnings and slashed its same store sales guidance. Holiday sales are normally strong for video games but apparently Gamestop was not offering what customers wanted.
Closed Feb $27 short put, entry $1.14, exit $1.19, -.05 loss.
LULU - Lululemon Athletica (Put Spread)
LULU did exactly the opposite of every other retailer last week. LULU raised earnings guidance for Q4 as a result of a very good holiday quarter. The company raised revenue guidance to a range of $690-$695 million, a 19% increase over Q4-2014 on a constant currency basis. They raised earnings guidance from 75-78 cents to 78-80 cents. The company said they had a very successful holiday season and sales exceeded their expectations.
Shares spiked to more than $60 on the announcement and faded back to $56 in the very weak market. The $53 level is decent support and has held for the last two weeks despite the market crash. With a positive market we should expect to see investors looking for a safe port to ride out any future volatility and a company that raised guidance is a good place to hide.
Earnings are March 24th.
Sell short Feb $50 put, currently .95, stop loss $52.45
Buy long Feb $45 put, currently .48, no stop loss.
Net credit 47 cents.
EOG - EOG Resources (Call spread)
EOG is one of the best shale producers in the country but they cannot compete with oil prices under $30. EOG and PXD are the top two companies in the space but oil prices should continue to fall to the $25 level in the days ahead. This will weigh on stocks in the sector. Every day there is an article about weakness in the sector with some analysts claiming as many as half could file bankruptcy. EOG is not in that category but they will continue to be dragged lower by the drop in oil prices.
Earnings Feb 25th
Sell short Feb $70 call, currently $1.12, stop loss $67.25
Buy long Feb $75 call, currently .50, no stop loss
Net credit 62 cents.
New Covered Call Recommendations
Monthly Cash Machine Recommendations
DIA - Dow SPDR ETF
The Dow closed at 16,000 on Friday or 159.66 on the DIA. The August flash crash low on the ETF was 150.57. We are severely oversold and the relief over the economics in China could cause a rally/short squeeze on Tuesday. The ETF closed right on support and now that option expiration is behind us we could be looking at some bargain hunting. The S&P futures are up +15 while I am typing this.
I am recommending the $145 put which corresponds to 14,500 on the Dow. That is another -1,500 points below where we closed on Friday and 550 points below the flash crash low in August.
Sell short Feb $145 put, currently $1.06, stop loss 153.85
Buy long Feb $135 put, currently .56, no stop loss.
Net credit 50 cents.
Original Play Recommendations (Alpha by Symbol)
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
OIH - Market Vectors Oil Service ETF (Call Spread)
The OIH is supposed to replicate the Oil Service Index, which represents U.S. listed companies that are involved in oil services to the upstream oil sector, which includes drillers, producers, etc. The service sector is in real trouble. With the price of oil collapsing and companies taking rigs out of service at a record rate the demand for oil services is shrinking fast. Oil is not expected to firm until May although we could see some short term spikes from short covering or based on headlines.
Service companies that have work are being forced to discount their prices deeper every month in order to win contracts. Producers claim their new contracts are 25% to 40% below the rates they paid this time last year.
The XLE also offers an attractive spread using the 59.50/63.50 calls with a 29-cent net credit.
Sell short Feb $25 call, currently 39 cents, stop loss $24.25
Buy long Feb $29 call, currently 6 cents, no stop loss.
Net credit 33 cents.
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 $80 call, currently 55 cents, no stop loss
Net credit 70 cents.
VXX - Vix Futures ETF (Call Spread)
The VXX is the ETF for the Volatility Index ($VIX). You can buy options on both but the options on the VIX are more expensive and has fewer strikes. The VXX has only traded over 38 once since 2014 and it was for a single day. The huge market volatility over the last couple of weeks has only succeeded in lifting it to 26. I am recommending a credit spread using the February 38/45 calls. There will not be a stop loss on this position because any spike in volatility that succeeds in lifting the VXX that high is likely to be very brief.
When the VXX was first introduced, it was considerably higher than it is today. When accounting for splits to keep is listed, it has traded well over 1,000. The vehicle is flawed and like so many other futures ETFs it has slowly declined over the years as fewer investors trade it. The flaw is obvious when the extreme volatility over the last three weeks has been unable to power it much higher.
Sell short Feb $38 call, currently .82, no stop loss
Buy long Feb $45 call, currently .52, no stop loss
Net credit 30 cents.
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.