The indexes have declined for four of the last five days but it may be too soon to count out the bulls.

The Dow has declined -558 points from its Wednesday high on April 20th. While that may seem like a lot, it is only about 3% and a garden-variety decline on profit taking. It was enough to blow us out of the majority of our positions. When coupled with some serious declines in individual sectors related to an earnings miss or two, all we have left is a lot of long puts.

I do not think we can assume the indexes are simply going to continue moving lower. In this type of market, it is more of a two-steps forward, one step back type of volatility. The Dow declined 2 days from the top, moved sideways for 3 days, then down 2, up 1, down 2. We are probably due for another short squeeze this week.

A topping process typically consists of a lot of high volatility days with triple digit moves and often in opposite directions.

The key levels to watch are the 17,500 level on the Dow and the 2,040 level on the S&P. If those levels break it would confirm a down trend into summer. On the upside the Dow needs to get back over 18,100 and the S&P over 2,100. We are still in striking distance for both of those resistance levels.

With the earnings cycle winding down and the majority of the major companies already reported, we are entering into the post earnings depression cycle. This is where the excitement leaves the stocks that have already reported as traders take profits and move on to the next stock to report in hopes of scoring another gain. Once they run out of stocks to play we end up in the Sell in May cycle that drags us down into summer.

Since the indexes are likely to be volatile the next couple of weeks I did not add any index plays to the Monthly Cash Machine section of the newsletter. We were knocked out of all the existing plays over the last week and without a confirmed market direction, it would be a coin toss on whether the positions would have a chance of success.

We should wait for a direction to form before we load up on new plays. I did add some extra plays in the Option Writer section of the newsletter for those readers that are itching for more action.

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

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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.

Lines in blue were previously closed.

Current positions

Monthly Cash Machine

Current Option Writer Position Changes

BHI - Baker Hughes (Short Put - Close)

Halliburton and Baker Hughes called off their merger and Halliburton will pay BHI a $3.5 billion breakup fee. With the deal dead and the option at 10 cents, I am recommending we close the position to prevent it from recovering is oil prices fall.

Close May $38 short put, entry $2.26, currently .10, +$2.16 gain.

PANW - Palo Alto Networks (Put spread - Stopped)

Palo Alto shares rolled over hard on April 29th to stop us out of the short pus side of the spread at $148.85. Fortunately, shares are still falling and the long put is now up more than we lost on the short put. I put a stop loss on the long put to prevent a rebound from erasing that gain.

Closed May $145 short put, entry $1.83, exit $3.30, -$1.47 loss
Retain May $135 long put, entry $.59, currently 2.10, +1.51 gain
Add stop loss on the long put at $145.85.

NXPI - NXP Semiconductor (Short Put - Stopped)

NXPI also dropped sharply on the 29th and is still dropping. We were stopped out at $83.85. I seriously doubt we will recover any loss on the long side because the $65 strike is well out of the money but we will retain it anyway.

Closed June $80 short put, entry $1.00, exit $2.35, -1.35 loss.
Retain June $65 long put, entry .08, currently .15.

Monthly Cash Machine Play Updates

DIA - Dow ETF (Put Spread - Stopped)

The Dow has fallen -558 points from the 18,167 high two weeks ago. The short put side of this position was stopped out at 177.75 on April 28th.

Closed May $162 short put, entry $1.09, exit .19, +.90 gain.
Retain May $155 long put, entry .10, currently .02.

IWM - Russell 2000 ETF (Put Spread - Stopped)

The Russell has declined from the 1,150 level ($115) to 1,100 ($110) today. We were stopped out at $111.45 on Tuesday.

Closed May $107 short put, entry .47, exit .53, -.06
Retain May $102 long put, entry .19, currently .12.

XBI - Biotech ETF (Put Spread - Stopped)

The biotech sector crashed with a -4.2% decline today alone. The XBI spread was stopped out at $54.50 on the 29th and the XBI has declined to $50.75 today. The sector is really struggling with earnings and political attacks.

Closed May $49 put, entry .86, exit .50, +.36 gain.
Retain May $43 long put, entry .23, currently .10.

IYT - Dow Transport ETF (Put Spread - Stopped)

The IYT also failed at resistance at $146 and has dropped back to $139. We were stopped out at $142.25 on Friday.

Closed May $133 short put, entry .78, exit .53, +.25 gain.
Retain May $124 put, entry .28, currently zero.

New Option Writer Recommendations

LNKD - Linkedin (June Put Spread)

Linkedin reported strong earnings, guidance and the internal components on users, page views, jobs, etc were also strong. Shares spiked on the news and then declined slightly in the weak market over the last two days. I believe they are going higher.

Earnings July 28th.

Sell short June $110 put, currently $1.38, stop loss $117.65
Buy long June $95 put, currently .28, no stop.
Net credit $1.10

STZ - Constellation Brands (June Put Spread)

Constellation blew out earnings in early April and spiked to $160. Since then they have traded in a $5 range with support at $155. Despite the weak market, shares have moved back up to $160 in the last week. I expect them to break out the next time the market turns positive.

Earnings June 30th.

Sell short June $150 put, currently $1.45, stop loss $153.85
Buy long June $135 put, currently .40, no stop loss.
Net credit $1.05.

Other Potential Plays (June Spreads)

These are not official plays but a good place to start if you are looking for something else to trade.

Symbol, strikes, premium, type, net

N - $90/$100, .90/.45, CS, .45
SNA - $145/$130, 1.25/.50, PS, .75
YUM - $75/$65, .96/.17, PS, .79
BWLD - $120/$110, 1.45/.70, PS, .75
TSLA - $170/$150, 2.26/1.08, PS, 1.18
NXPI - $92.5/$100, .90/.25, CS, .65
NFLX - $80/$70, 1.21/.34, PS, .87
BMRN - $90/$100, 2.35/.95, CS, 1.40

New Covered Call Recommendations

No New Covered Calls

New Monthly Cash Machine Recommendations

XBI - Biotech ETF (June Put Spread)

While the biotech sector is in decline, the index is approaching very strong support. On the XBI that support is at the $48-$50 level. I am recommending a spread below the February lows so without a total market meltdown we should be ok.

Sell short June $43 put, currently .70, stop loss $46.85
Buy long June $38 put, currently .25, no stop loss.
Net credit 45 cents.

XLE - Energy ETF (June Put Spread)

Crude inventories should begin declining over the next couple weeks as refiners kick into high gear to fill up the system with summer blend gasoline for the driving season. Typically when that happens the price of oil rises along with energy stocks. The decline in oil prices over the last couple days has been related to a rebond in the dollar rather than oil fundamentals.

Sell short June $58 put, currently, .56, stop loss $61.85
Buy long June $53 put, currently .20, no stop loss
Net credit 36 cents.

Existing Option Writer Positions (Alpha by Symbol)

THESE ARE NOT CURRENT RECOMMENDATIONS. These are prior recommendations that are still active in the portfolio. Do NOT act on the plays described in this section. This is the archive of prior recommendations in the current portfolio.

AMBA - Ambarella (May - Naked Put/Put Spread)

Ambarella rebounded from a one day dip on Wednesday to return to the top of its recent range. If the positive market is going to continue we could see shares move higher from here. GoPro has been the biggest drag on Ambarella and GPRO rallied 19% on Friday on acquisition rumors and short covering.

Ambarella shares moved sideways through all the market volatility over the last two weeks with the exception of Tuesday. That is good relative strength.

Earnings June 2nd.

Sell short May $40 put, currently $1.20, stop loss $42.50

You could do a May put spread as an alternate strategy.

Sell short May $40 put, currently $1.20, stop loss $42.50
Buy long May $35 put, currently .40, no stop loss.
Net credit 80 cents.

AVGO - Broadcom Ltd (May - Put Spread)

Avago acquired Broadcom and changed the name to Broadcom but kept the AVGO symbol. This company now has a broad spectrum of offerings and wide customer base. Shares are breaking out to new highs and nobody can say anything negative about them. This is a put spread $20 OTM so even though this is a high dollar stock we will be able to stop out well before trouble can cause any damage.

Earnings may 26th.

Sell short May $135 Put, currently $1.00, stop loss $146.50
Buy long $115 put, currently .25, no stop loss.
Net credit 75 cents.

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.

Update 4/6/16: The U.S. sued BHI/HAL to block the transaction and the companies said they were going to fight it. I do not see this transaction completing based on the latest information. HAL is going to be forced to pay the $3.5 billion breakup fee but it would be months into the future. Be patient.

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

FDX - FedEx (May Put Spread)

Shares are trading at a nine-month high after strong earnings in late March. The company said it was not worried about Amazon moving into the space because it would take tens of billions of dollars and years to achieve enough scale to be a threat. Fedex has 65,000 vehicles. Amazon has several hundred.

Earnings June 21st.

Sell short May $160 put, currently $1.13, stop loss $162.85
Buy long May $150 put, currently .35, no stop loss.
Net credit $.78

NFLX - Netflix (May Put Spread)

Netflix can stream billions of hours of video but they cannot get the guidance right. They beat on earnings and guided higher on 4 of 5 metrics. That 5th metric caused a $14 crash in the stock price. After the gains going into the earnings cycle the stock was priced to perfection. Shares dipped to $93.14 at the open and was immediately bought to end the day at $96.77 on high volume.

I am recommending a May spread but you could also do the June spread. My only worry with a June date is that the broader market may (should) roll over before that expiration.

Earnings July 18th.

Sell short May $90 put, currently $1.61, stop loss $92.85
Buy long May $80 put, currently .38, no stop loss.
Net credit $1.23

NXPI - NXP Semiconductors (June Put Spread)

NXP Semiconductor provides high performance mixed signal and standard product solutions for radio frequency, analog and digital processing products worldwide. That means they make chips for cell phones and other communication devices.

The price target for NXPI was raised from $102 to $115 at Drexel Hamilton today after the company beat estimates for earnings. They posted earnings of 1.14 compared to estimates for $1.09 and revenue of $2.22 billion also beat.

Earnings July 25th.

Sell short June $80 put, currently $1.10, stop loss $83.85
Buy long June $65 put, currently .20, no stop loss
Net credit 90 cents.

PANW - Palo Alto Networks (May Put Spread)

Palo Alto provides enterprise level security to corporations, service providers and government entities worldwide. They offer advanced endpoint protection that prevents cyber attacks. Last 7 analyst ratings, either new or upgrades, have been to buy. Last week Morgan Stanley raised the price target from $171 to $185 with a buy rating.

Earnings May 26th.

Sell short May $145 put, currently $1.60, stop loss $148.85
Buy long May $135 put, currently .60, no stop loss.
Net credit $1.00.

STMP - (May - Call Spread)

Stamps blew out earnings on February 26th and shares rallied from $96 to $120 on a monster short squeeze. Since early March shares have been sliding lower because traders understand that the next move will be at the May 26th earnings. They have gapped up after earnings for the last five quarters and then traded sideways or down for the rest of the quarter.

Earnings May 26th.

Sell short May $125 call, currently $2.10, initial stop loss $117.85
Buy long May $140 call, currently 65 cents. No stop loss.
Net credit $1.45

Existing Monthly Cash Machine Positions

THESE ARE NOT CURRENT RECOMMENDATIONS. These are prior recommendations that are still active in the portfolio. Do NOT act on the plays described in this section. This is the archive of prior recommendations in the current portfolio.

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.

IWM - Russell 2000 ETF (May Put Spread)

It was tough finding a May spread that had any premium value. The steady move higher has evaporated all the put premiums but the call premiums are also flat because nobody expects the indexes to move over resistance.

The Russell moved over short-term resistance last week and is closing in on the 1,165 level which should be reasonably strong. If the big cap indexes can continue to move higher through resistance the Russell should do the same. The Russell has been one of the strongest gainers over the last six days.

This spread was as far away from the current price as I could get and still have a minimum 25-cent credit. I would NOT enter this position if the market is negative at the open on Thursday. I would wait until the Russell 2000 was positive before entering this spread.

Sell short May $107 put, currently 47 cents, stop loss $111.45
Buy long May $102 put, currently 18 cents, no stop loss.
Net credit 29 cents.

IYT - Dow Transport ETF (May Put Spread)

Wednesday's short squeeze may have erased the negativity in the transports. The index had moved sideways for the prior week after a week of declines. This spike probably cleared out the remaining shorts.

Sell short May $133 put, currently .70, stop loss $136.45
Buy long May $124 put, currently .35, no stop loss.
Net credit 35 cents.

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

With the breakout to $208 on the SPY it shrank the premiums on the puts below the recent congestion band. We will have to be content with a 50 cent play. We do have support at $204 but plenty of resistance at $211.

Sell short May $199 put, currently $1.08, stop loss $203.50
Buy long May $192 put, currently .51, no stop loss.
Net credit 57 cents.

XBI - Biotech ETF (May Put Spread)

The biotech sector exploded higher this week after consolidating for two months. The cancellation of the Pfizer/Allergan deal left Allergan with $34 billion in cash and looking for acquisition candidates. The majority of stocks posted strong gains. The XBI blew through resistance at $54 and never looked back.

Sell short May $49 put, currently .80, stop loss $51.15
Buy long May $43 put, currently .30, no stop loss.
Net credit 50 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.