Wednesday's decline was a test of conviction for the bulls. After five-weeks of gains it was time for some profit taking.

The trick question here is whether this was a one-day wonder or the start of a real decline. Typically after a five-week 13% gain on the S&P, we would see a 3-5% decline before the index moves higher. This should be especially true with the very strong overhead resistance from 2,075-2,100 on the S&P. You would expect traders to want to see some profit taking and then get a running start at that resistance.

Thursday before the three-day Easter weekend is normally bullish. However, we may be handicapped this year because of the calendar and the events in Brussels. Easter fell in the third week of April and that is normally a neutral week for fund managers. They are trying to decide how to restructure their portfolios for the end of the quarter and the quarter ahead. Those moves typically come in the last week of the month and this week is flat.

Also, the terrorist attacks overseas ahead of the Easter holiday could put some event risk into this weekend. I am not sure traders are going to want to hold longs over the weekend for fear of an attack on Easter Sunday. ISIS said today they had inserted 400 trained fighters into Europe and the "black days" were just beginning. Whether you believe them or not it is something to think about over a three-day weekend.

The S&P and the Dow spent 4 days hovering just under downtrend resistance before taking profits today. However, volume was only slightly higher at 6.8 billion shares than the prior two days averaging 6.15 billion. The internals were skewed but not really that weak. Decliners were 3:1 over advancers. I looked at several hundred charts today and most declines we $1 or less. There were some big dips on stocks with big gains. Polaris (PII) was one of those that gave back $3.50 after a $30 gain since early February.

I am only adding a small number of plays this week. We are reaching that point on the calendar where April options have no premium and May expiration is a long way from here and a lot can happen. Add in the fact that 75% of stocks have earnings in the next five weeks and it is tough to find stocks that do not have earnings before May expiration. With the weekend event risk and the weak market on Wednesday I decided it was better to be cautious than aggressive.

Anyone receiving this newsletter can use any of the recommendations. Just because you may be a Cash Machine subscriber does not mean you cannot use the Option Writer plays. You have a lot more options in this newsletter format.

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.

Lines in blue were previously closed.

Current positions

Covered Calls

Monthly Cash Machine

March Position Recap

We were fortunate in the March option cycle with the market in a bullish trend for most of the time. There were still bouts of volatility and we were stopped out on several positions but the full month was positive.

Option Writer March Recap

In the Cash Machine portfolio we were hammered by the volatility in gold. The yellow metal rallied from $1,095 to $1,263 and appeared to roll over. The two call spreads we launched on gold at the "top" were unfortunately not at the top at all and the extreme intraday volatility in late February and early March inflated option premiums and we lost $272 dollars in the first two positions on the list.

The sharp market drop to the 15,503 low on the Dow on February knocked us out of the DIA put spread for another net loss of $95. If you think back to the mid February market volatility it was very hard to launch positions in either direction without being stopped.

In the current Cash Machine portfolio listed above we are doing a lot better in the April cycle thanks to a trending market.

Current Option Writer Position Changes

DRII - Diamond Resorts (Covered Call - Stopped)

Diamond Resorts dropped -15% on Monday after a marketing practices probe was announced on one of their competitors. It had nothing to do with DRII but the entire sector suffered from the headline. DRII is attempting to rebound and was even up today in a weak market. I would not have a problem reentering this position.

We had two DRII calls but the only one stopped out was the one entered last week at a higher level.

Closed DRII shares, entry $25.52, exit $22.85, -2.67 loss.
Closed Apr $25 call, entry $2.05, exit R1.25, +.80 gain.
Net loss $1.67

Monthly Cash Machine Play Updates

XLV - S&P Healthcare ETF (Stopped)

The short side of the XLV spread was stopped out on the 17th when the XLV declined to hit our stop loss at $66.45. Fortunately we did not lose any money on the exit. I would advise against reentering the short position at this time. The XLV rebounded but resistance has appeared at $68.

Closed April $63 put, entry .43, exit .43, zero loss.
Retain April $58 long put, entry .07, currently .02.

New Option Writer Recommendations

BHI - Baker Hughes (July - Naked Put)

Baker Hughes is being acquired by Halliburton. They have received all the regulatory approvals except for the U.S. and EU. The EU regulators had set a date of not later than July 11th for a decision. However, they stopped the clock again on Monday because of some missing data needed from Halliburton. Halliburton is submitting a package of divestitures to satisfy their requirements and gain approval. Once Halliburton submits the data the clock will restart. The date expands by one day every day the data is not complete so today the date is July 15th and counting. If HAL cannot gain approval there is a $3.5 billion breakup fee due to Baker Hughes.

The price HAL is paying for BHI is 1.2 Halliburton shares plus $19. Based on today's prices that is $58.23 and BHI closed at $44.96. In other words, if the EU approved the deal tomorrow, BHI shares would rocket to something close to $58.

If the EU fails to approve the deal as presented Halliburton has an extreme incentive in the $3.5 billion breakup fee to make the changes needed to get the deal done. The U.S. is pressuring Halliburton to sell more assets. HAL/BHI have offered to sell $7.5 billion in noncore assets. Once the EU approves the deal I would expect HAL to cough up some more assets and the U.S. approval could be acquired quickly.

This is going to be a long-term play. I originally planned it for the July strikes. After the events this week I am going to make it a May position and as we get closer to May we can also sell a July position and double dip. While no position is foolproof, this one should be relatively safe. Annual revenue for BHI was $15 billion in 2015 and it was a bad year. They have already written off all their nonperforming assets and made massive layoffs. Receiving a $3.5 billion beak up fee with oil prices rising would be a major lift for the company. Either completing the merger or not completing the merger the share price should move higher.

The $38 strike would be a four-year low. Earnings are April 21st but should not matter.

Sell short May $38 put, currently $2.10, no initial stop loss.

PII - Polaris Industries (April - Put Spread)

Polaris has been moving steadily higher until today when traders took some profits in a weak market. I believe the trend will resume once the market recovers. They made an excellent acquisition a couple weeks ago that will be very beneficial for vehicles in the business space.

Earnings are April 21st.

Sell short April $90 put, currently .85, stop loss $93.85
Buy long April $80 put, currently .20, no stop loss
Net credit 65 cents.

New Covered Call Recommendations

No New Covered Calls

Monthly Cash Machine Recommendations

DIA - Dow ETF (May - Put Spread)

The Dow has rebounded from 15,500 to 17,500 over the last five weeks. The index is facing significant resistance over that level but is showing no indications of a decline. I do expect some choppy trading in the 17,500-18,000 range and the eventual failure as we head into summer.

I am recommending a 162-155 put spread on the DIA because I do not expect the Dow to decline that far in the next six weeks. If it only remains in the 175-180 range for 3-4 weeks we will be able to close the spread for a profit long before the May expiration.

Sell short May $162 put, currently $1.08, stop loss $167.50
Buy long May $155 put, currently 63 cents, no stop.
Net credit 45 cents.

Original Option Writer Recommendations (Alpha by Symbol)

CVX - Chevron (April - Put Spread)

Chevron exploded out of the starting gate on Wednesday with a $4 gain after the company said they were slashing capital expenses, raising production and the dividend was secure through 2017. Having crude prices rise to a 2016 high at $38 did not hurt either.

Earnings Apr 29th.

Sell short April $85 put, currently $1.04, stop loss $86.85
Buy long April $75.00 put, currently .21, no stop loss.
Net credit 83 cents.

DIS - Disney (April - Put Spread)

Disney's new movie Zootopia is smashing records at the box office and several more movies will be out in the next couple months. Shanghai Disney will also open in the spring to as many as 100 million visitors in the first year. Profits are guaranteed for the mouse house.

Earnings May 3rd.

Sell short April $92.50 put, currently .96, stop loss $94.85
Buy long April $85 put, currently .26, no stop loss
Net credit 70 cents.

DRII - Diamond Resorts (Covered Call)

Diamond Resorts is rumored to be planning to take itself private in a leveraged buyout as the result of a previously announced strategic review. Analysts are expecting a deal price in the $32-$35 range. The company has a network of 375 vacation destinations in 35 countries. The firm hired Centerview Partners to evaluate all strategic alternatives after two major shareholders requested the board take action including an outright sale. Marriott Vacations Worldwide and Wyndham Worldwide could be suitors. More than 23% of DRII shares are sold short.

Earnings May 25th.

Buy-write DRII April $25 call, currently $23.42-$1.90, no initial stop loss.
Net debit $21.52, gain if called $3.48 or 16%.

DRII - Diamond Resorts Intl (Covered Call)

We already have a covered call position on Diamond. The stock continues to rise and the expected buyout price is $30. We have the opportunity to write another call with a $2 premium on a strongly bullish stock. If you are already in the current DRII position I would avoid doubling up. You should always limit your risk to any one company just in case trouble appears.

Earnings April 27th.

Buy-Write DRII April $25 call, currently $$25.54-$2.55, stop loss $22.85
Gain if called $2.01

HLF - Herbalife (April - Put Spread)

After the company beat earnings on the 23rd and said they were discussing a settlement with the government the stock has been climbing. Even a database error several days later that misstated the number of new members failed to hold it back for more than one day. Shares are poised to break out to a new 52-week high.

Earnings May 5th.

Sell short April $50 put, currently .79, stop loss $53.55
Buy long April $40 put, currently .29, no stop
Net credit 50 cents.

NFLX - Netflix (April - Put Spread)

We already have to put spreads on Netflix for March but there is nothing stopping us from repeating the plays using April strikes. Netflix consistently has higher option premiums than 95% of the stock with options. As long as it maintains a choppy upward bias that should continue.

Earnings April 21st.

Sell short April $80 put, currently $1.81, stop loss $86.50
Buy long April $65 put, currently .46, no stop.
Net credit $1.35

SM - SM Energy (Covered Call)

SM is the same story as WLL. Strong short squeeze on rising oil prices. When oil prices faded last week the equity prices barely dipped.

Earnings May 24th.

Buy-Write SM April $20 cov call, currently $18.95-$1.75, stop loss $14.15
Gain if called $2.80

SNA - Snap On Inc (April - Put Spread)

Snap On is rebounding strongly from the February dip with support from last week at $150. They posted earnings of $2.22 compared to estimates for $2.16 and declared a quarterly dividend of 61 cents. Shares took off and have gained $20 since the event.

Earnings April 21st.

Sell April $145 put, currently $1.00, stop loss $149.45
Buy long April $130 put, currently .40, no stop
Net credit 60 cents.

WLL - Whiting Petroleum (Covered Call)

Whiting shares spiked on the rising price of oil and news that the company would present at the Raymond James Investor Conference on March 8th. This is strictly an oversold bounce play and capitalizing on the spike in the option price. At 80 cents it is 20% of the stock price and should give us some downside protection.

Earnings May 25th.

Buy write WLL Apr $5 call, currently $5.21-.80, no initial stop loss.
Net debit $4.41.

WLL - Whiting Petroleum (Covered Call)

We already have a covered call on Whiting at $5 but shares have spiked to more than $8 and we can add another one for those readers that missed the first one. Oil prices have broken over resistance at $38.50 tonight and shares of energy stocks are likely to spike up again at the open.

Earnings may 25th.

Buy-Write WLL April $9 call, currently $8.67-$1.00, stop loss $6.75
Gain if called $1.33.

WYNN - Wynn Resorts (April - Put Spread)

Wynn has been surging higher after Steven Wynn bought 2 million shares in the open market ahead of the data for February out of Macau. Gambling revenue declined only -0.1% in February. That was the least in 21 months and much better than the -21.4% drop in January. The lunar new year had a lot to do with it but fortunes are improving.

Earnings April 28th.

Sell short April $70 put, currently $1.09, stop loss $74.85
Buy long April $55 put, currently .18, no stop loss
Net credit 91 cents.

Monthly Cash Machine Positions

IWM - Russell 2000 ETF (Put Spread)

The Russell has dipped twice to the 950 level and the last rebound was stronger than the other indexes. The buyers appear to be coming back to the small caps. If the Russell 2000 breaks over 1,040 it should be a race to the 1,150 range.

The IWM low on the 11th was $93.64.

I had to go out to April to find any premium that was not close to the money on the IWM.

Sell short April $90 put, currently 71 cents, stop loss $93.75
Buy long April $80 put, currently 18 cents, no stop.
Net debit 53 cents.

IYT - Dow Transports ETF (April - Put Spread)

The Dow Transports continue to climb after a year of steep losses. The economy appears to be edging away from a potential recession and the transports are celebrating. We already have a March put spread and I am adding an April spread to capitalize on the move.

Sell short April $125 put, currently $1.20, stop loss $129.35
Buy long April $115 put, currently .50, no stop loss
Net credit 70 cents.

QQQ - Nasdaq 100 ETF (April - Put Spread)

The Nasdaq accelerated higher on Wednesday and closed at the high for 2016. Nasdaq futures are up +13 overnight and tech stocks appear to be the favorite post Fed fare. I looked at a lot of charts today and they were up the strongest.

Sell short April $100 put, currently .43, stop loss $103.35
Buy long April $93 put, currently 11 cents. No stop.
Net credit 31 cents.

SPY - S&P-500 ETF (April - Put Spread)

We had an expiring March put spread on the SPY. With the market moving higher and breaking through resistance level we can put on a new April SPY spread to replace the one that is expiring this week.

Sell short April $190 put, currently $.61, stop loss $195.65
Buy long April $184 put, currently $.31, no stop.
Net credit 30 cents.

VXX - VIX Futures (Call Spread)

The VXX short-term futures have risen to $30 twice in the last six months. They traded at $18 for two months in the middle. The VIX has been elevated since mid January and the volatility should be about over unless the market rolls over soon and heads to new lows. The internals and the market action suggest there are buyers starting to show up in greater volume. The Russell 2000 is the market sentiment indicator and it appears about ready to break out of its recent range. I don't think we are going back to 30 for any appreciable amount of time.

I am recommending the April call spread. That way we do not have to worry about a sudden pop over the next three weeks. We do not have to wait until the spread expires. If the VXX returns to 18 the premiums will evaporate and we will close it early.

We do not need a stop loss because there is almost zero chance of a spike in volatility over 30 on the VXX that lasts for two months. Even if the market is declining or choppy the volatility can decline. It is only the 250 point gap down opens that really juice the VXX.

Sell short April $30 call, currently 99 cents. No stop loss.
Buy long April $40 call, currently 26 cents. No stop loss.
Net credit 73 cents.

XBI - S&P Biotech ETF (April - Put Spread)

The biotech sector appears to be healing after a low in early February and a higher los last week. The close on the ETF on Wednesday was a six-week high. With the market in rally mode the biotechs have been providing support.

Sell short April $45 put, currently 90 cents, stop loss $47.65
Buy long April $37 put, currently 40 cents, no stop loss
Net credit 50 cents.

XLE - S&P SPDR Energy ETF (April - Put Spread)

The rise in oil prices have caused a massive short squeeze in most energy stocks. The energy ETFs are on fire. With inventory build season ending in three weeks the price of oil is likely to dip some but remain relatively firm. Energy equities should also remain firm with only a little profit taking. OPEC members and Russia are meeting in Moscow on March 20th to formerly agree on a production freeze.

Sell short April $53 Put, currently .42, stop loss $56.35
Buy long April $48 put, currently .16, no stop loss.
Net credit 26 cents.

XLV - S&P Healthcare ETF (April - Put Spread)

The Healthcare sector has rebounded from the January lows because the boomer generation is getting older and requiring more healthcare. The political winds may be blowing but senior healthcare is going to be another third rail of election politics. Don't threaten it or we will not vote for you.

Sell short April $63 put, currently .42, stop loss $65.85
Buy long April $58 put, currently .12, 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.