Asian markets are down 2% to 4% again on Wednesday and China is not even open this week.
Monetary stimulus in Japan finally pushed their interest rates into negative territory and the Nikkei is down -9% in just the first three days of trading. The Nikkei was down -5.4% on Tuesday and it already down another -3.4% on Wednesday.
The positive side to this global malaise is that the Federal Reserve will not be able to hike rates any farther in the near future. With Yellen testifying before the House on Wednesday and the Senate on Thursday she is going to have to be very careful in what she says to keep from spooking the market.
That could create the opposite impact and give us a market bounce. Yellen is typically very dovish even when she is trying to be stern. Keep your fingers crossed that she succeeds in keeping the equity markets calm.
Crude prices are another market impact and they traded under $28 on Tuesday and rallied slightly overnight ahead of the EIA inventory report on Wednesday morning.
Today the direction is down but we are very oversold. I hesitated to play any call spreads on the indexes because of the potential for a monster short squeeze at any time.
The equity markets remain volatile and we have to make the best of a bad situation. I tried to find some plays that appeared to have less risk but there is no such animal in this market. If you do not want to play in the market until a direction emerges, I completely understand. It never hurts to sit out a week and wait for a direction to appear.
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.
Lines in blue were previously closed.
Monthly Cash Machine
Current Position Changes
PVH - PVH Corp (Stopped)
We had a long $80 call left over from the initial position. PVH declined to hit our profit stop on Thursday. That closes out the PVH position.
Previously closed Feb $75 short call, entry $1.29, exit .86, +.43 gain.
Previously closed short Feb $75 call, entry .70, exit .95, -.25 loss.
Stopped Feb $80 long call, entry .45, exit .95, +.50 gain
Net gain 68 cents.
EOG - EOG Resources (Closed)
We had a long call leftover from the initial position. EOG had rallied significantly and i recommended we close the call last Thursday. This offset the loss on the short position.
Closed: Feb $75 long call, entry .23, exit .90, +.67 gain.
Previously closed, Feb $70 short call, entry $1.27, exit $1.87, -.60 loss
Net gain 7 cents.
LULU - LuluLemon (stopped)
Lulu's rise to glory came to a sudden end in the Nasdaq crash over the last several days. Shares fell -$8 on no news. It was all market related and nothing changed for LULU.
Closed Feb $50 short put, entry .83, exit .12, +.71 gain.
Retain Feb $45 long put, entry .31, currently .08.
DIA - Dow ETF (Closed)
The short put on the DIA ETF has declined from 82 cents to 6 cents. In this period of heightened index volatility I recommending we close the short put last week.
Closed Feb $145 short put, entry .82, exit .10, +.72 gain.
Retain Feb $135 long put, entry .38, currently .02.
IWM - Russell 200 ETF (Stopped)
The Russell has been dropping like a rock and we were stopped out of the short position at 97.55 on the ETF on Monday. The long position is still open but it would take a major market decline to put that $84 put near the money. The put has value today and you could close it to break even. However, with the Russell flirting with long term support at 954 there is a good chance we could see some lower lows.
Closed Feb $90 short put, entry .28, exit .42, -.14 loss.
Retain Feb $84 long put, entry .08, currently .09
NFLX - Netflix (Put Spread)
Netflix gained +2.81 on Tuesday in a very choppy market. Shares failed to decline on Monday in a very negative market. I believe the $80 level is long-term support. With Mark Cuban going public with another big buy of Netflix shares late last week he might have turned the sentiment away from bearish. With shares at $85, I am recommending a put spread at $65. While i cannot conceive of share dropping that low without a bear market it is always possible.
Sell short March $65 put, currently 91 cents, stop loss $76.25
Buy long March $55 put, currently .38, no stop loss.
Net credit 53 cents.
FB - Facebook (Put Spread)
The market correction has crushed all the air out of Facebook since their record earnings. There was a $13 spike after the earnings and it has been erased. Shares are back to long term uptrend support, which just happens to coincide with the 200-day average. Facebook has not closed under the 200-day since the middle of 2013. I think we should be safe with this one.
Sell short Mar $85 put, currently $1.27, stop loss $90.85
Buy long Mar $75 put, currently .45, no stop loss
Net credit 82 cents.
PVH - PVH Corp (Put Spread)
We just exited a play on PVH after the stock spiked to nearly $80 on a new deal with GIII Apparel. Shares fell back to $69 in three trading days because Ralph Lauren (RL) warned on earnings. The Nasdaq implosion and a drop in retail in general also contributed. PVH has found support in the $70 range and with any positive market it should begin to move higher again. The deal with GIII Apparel could add $1 billion in revenue to PVH.
I am recommending a put strike that is $4 below the January market crash lows.
Sell short March $60 put, currently .85, stop loss $64.25
Buy long march $50 put, currently .35, no stop loss
Net credit 50 cents.
New Covered Call Recommendations
None until bullish market bias returns
Monthly Cash Machine Recommendations
GLD - SPDR Gold shares (Call Spread)
Gold exploded higher over the last month from $1,056 to $1,191. The sudden interest in gold came from the meltdown in China and the weak economics in the USA. The Dollar index fell -4% from nearly 100 to 96. I think gold has reached its peak for this cycle. The $1,200 level was major resistance for four months back in early 2015. The equity market is oversold and due for a rally and the dollar is oversold and due for a bounce. The wild card here is Yellen on Wednesday. As long as she maintains the Fed stance as ready to implement gradual hikes for the next two years the dollar will recover.
I am recommending the March $125 call to short. That is the equivalent to $1,250 on gold. On the GLD that is $10 over strong resistance at $115.
Sell short March $125 call, currently .48, stop loss $118.65
Buy long March $132 call, currently .18, no stop loss
Net credit 30 cents.
IYT - Dow Transports ETF (Put Spread)
Low oil finally reached the point where the Dow Transports are in an uptrend after months in a bear market. Shares rallied today in a very choppy market. The airlines rallied because the WHO did not implement any global travel restrictions because of the Zika virus. Transports have been moving up for three weeks and the last three weeks have been very bad for the market. I am recommending a short strike that is well below the January lows.
Sell short March $110 put, currently .80, stop loss $118.45
Buy long March $100 put, currently .45, no stop loss
Net credit 35 cents.
Original Play Recommendations (Alpha by Symbol)
BABA - Alibaba (Call Spread)
Alibaba reported better than expected earnings but the lowest increase in gross merchandise volume in three years. The economic slowdown in China is impacting their sales and the ever present worries over management and accounting issues are also a concern. Shares completed a death cross of the 50/200 day averages this week.
Sell short March $72.50 call, currently 72 cents, stop loss $69.45
Buy long March $80 call, currently 17 cents, no stop loss
Net credit 55 cents.
DAL - Delta Airlines (Feb Call Spread)
Delta and the other airlines are suffering from the Zika virus. Because the virus is spreading like wildfire in South America and Latin America the airlines are being forced to give refunds and cancel flights for pregnant women and their traveling companions. The virus slows brain development in the fetus.
Delta is offering a change to an alternate destination, alternate travel dates or a refund. They are also exempt from fees to change future reservations and tickets.
This is causing a lot of trip cancellations. The airlines are just now digging out from the nearly 14,000 flight cancellations last weekend because of the snow storm in the Northeast.
Earnings April 13th.
Sell short Feb $48 call, currently 44 cents, stop loss $47.05
Buy long Feb $51 call, currently 11 cents, no stop.
Net credit 33 cents.
DAL - Delta Airlines (March Call Spread)
Delta will continue to struggle with the rising number of Zika virus cases and will be forced to give refunds and/or cancellations. The governor of Florida declared a health emergency in four counties on Wednesday because of 9 new Zika cases. This is only going to get worse. Rising oil prices are also going to be a challenge if OPEC follows through on an actual meeting.
Sell short March $48 call, currently 65 cents. Stop loss $46.25
Buy long March $52.50 call, currently 14 cents, no stop loss
Net credit 51 cents.
DIA - Dow SPDR ETF (Feb Put Spread)
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.
DIA - Dow ETF (March Put Spread)
I am replacing the expiring February put spread with a new march spread. This is so far OTM it will be very hard to be hit. I said hard, not impossible.
Sell short March $145 put, currently 72 cents. Stop loss $155.85
Buy long March $130 put, currently 20 cents, no stop loss.
Net credit 52 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.
IWM - Russell 2000 ETF
The IWM dipped to $95 on the Wednesday crash last week. The decline today inflated premiums slightly and we can get a $90-$84 put spread for a 25 cent credit. The IWM closed at $99.68 today and a dip to 90 would equate to a drop on the Russell 2000 to 900 and it is currently 1,002. That would be another 10% decline. This makes our proposed spread relatively safe, if there is such a thing in this market.
Sell short IWM Feb $90 put, currently 36 cents, stop loss $94.25, under the Wednesday low.
Buy long Feb $84 put, currently 11 cents, no stop.
Net credit 25 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.
SPY - S&P SPDR ETF (Put Spread)
This is well OTM and would require a severe market meltdown to be hit. This would require a -300 point S&P decline to reach the short strike and we will be out well before that could happen.
Sell short March $162 put, currently 51 cents, stop loss 182.25
Buy long March $150 put, currently 21 cents, no stop loss
Net credit 30 cents.
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 $1.95.
VXX - Vix Futures ETF (Call Spread)
The VXX is the ETF for the Volatility Index ($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.
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.
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.