I really enjoyed updating the newsletter today. Despite the extreme volatility, all of our current positions are performing well.

I was afraid to open up my charts today after a -566 point drop on the Dow and -166 point intraday drop on the Nasdaq. Fortunately, we were on the right side in most of the positions or at least so far out of the money that the move did not matter.

The overnight futures are strongly positive suggesting the rebound from the October 2014 lows on the S&P at 1,820 could stick. I am sure it is mostly short covering but the market sentiment definitely changed after the big afternoon rebound.

The S&P futures are up +17 as I type this but that could change based on the Asian markets. They are all positive at the open.

I would like to think the massive and prolonged selling since December 29th is over but even if the worst is behind us I am sure there will be bouts of weakness along the way.

This could also be just another bear trap where the market rebounds on short covering and then the bears attack again in hopes of creating another leg down.

We can never know for sure until we look back on it a month from now and say "I really wish I had bought a bunch of stock" OR "I am sure glad I did not buy that bounce." We have all said both of those phrases many times. Hindsight is always 20:20.

Caution remains the keyword for the week. You do not have to trade. Being bored is better than being broke.

The Option Writer newsletter and Monthly Cash Machine newsletters have merged. The strategies were similar and it was a duplication of effort producing them both. I routinely had readers asking me "what is the difference?" The difference was the MCM dealt only in spreads with the idea of pocketing a few cents off each position and setting on the position for the entire month. In this era of extreme volatility that was very difficult to do.

The Option Writer also does spreads but offers Covered Calls and Naked Puts when the market allows for those strategies. By merging the two newsletters, subscribers to the MCM now have the additional strategies available for their use.

The combined newsletter will be regularly scheduled for Wednesday nights but can appear at any time when the situation warrants.

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

Monthly Cash Machine

Current Position Changes

No Changes

New Recommendations

VIX - Volatility Index (Call Spread)

Volatility spiked to 32 on the VIX today before falling back to close at $27.50 with the Dow still down -250 at the close. The massive imbalance in the internals with decliners 30:1 over advancers at the intraday lows, suggests we have seen a capitulation event. Volume was massive at 12.4 billion shares.

The rebound was clearly fueled by short covering but it may not be over. The futures are up +17 as I type this. The drop in the S&P to the October 2014 Ebola low at 1,820 was quickly bought and the rebound took it back to 1,860. That is a massive rebound and represents some decent buying in addition to the short squeeze.

The VIX closed at 27.50 and will probably open on Thursday at $25 or lower. I am recommending an ITM spread tonight because I expect it to be ATM at the open tomorrow. If the massive selling has finally run its course, even if there is some follow on bouts of weakness, then the VIX should decline quickly. The February strikes have 27 days until expiration.

I am not putting a stop loss on it since it is "volatile" which should be no surprise. It is a cash settled index but nobody ever exercises their calls until the last minute or they just sell them back into the market.

Sell short Feb $25 call, currently $3.00, no stop
Buy long Feb $35 call, currently $1.05, no stop loss
Net credit $1.95.

New Covered Call Recommendations


Monthly Cash Machine Recommendations

XOP - Oil Exploration ETF

Crude oil closed at a 13 year low on Wednesday at $26.55. Much of the decline was due to the expiring February contract. Starting tomorrow the March futures contract becomes the front month contract. The march futures are trading at $28.66 tonight. This could cause the markets and energy stocks to rise at the open on Thursday as uninformed traders believe oil prices have risen.

The API inventory report after the bell tonight showed a gain of 4.6 million barrels of oil and a similar rise in gasoline. The EIA report due out at 10:30 tomorrow will be more accurate and is expected to show a big build in crude. This should damper any further rise in price.

Also, traders who successfully rode the February contract down to 13 year lows are sure to pile on to the March contract and try to duplicate their luck.

Oil prices should continue falling through March as inventories build. However, they are reaching levels where further declines are going to be hard fought. Regardless, U.S. producers are going to see their stocks continue lower because nobody can make any money under $30 and most are losing money under $50.

I am recommending a February call spread on the exploration ETF to capitalize on the further decline in crude prices.

Sell Feb $28 call, currently 37 cents, stop loss $26.45
Buy long Feb $31 call, currently 12 cents, no stop loss.
Net credit 25 cents.

Original Play Recommendations (Alpha by Symbol)


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.

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.

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.

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.

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.