The markets paused for some light profit taking on Monday but the trend should remain positive.

The selling was very light except for the stocks where we had short positions. PXD declined -9, ACIA -5, CLVS -3 and LLY fell another -2 after a -$12 drop on bad news last week. To say the profit taking was light depends on which stocks you were holding.

The Dow and Nasdaq 100 only declined a quarter of a percent each. The S&P lost half a percent but the Biotech Index fell -2.4%.

I looked at more than 500 charts today and quite a few had their lows early in the day and then recovered to erase most of their losses to close fractionally negative. There were 2:1 decliners over advancers and volume was moderate at 6.5 billion shares.

It was as close as you could get to a textbook example of profit taking. There was no rush of sellers. Everything was orderly and calm and the VIX rose less than 1 point. The orderly selling is actually a little concerning. If there is no panic, the weak holders will remain in the market. They are waiting for something to chase them to the sidelines rather than slowly erode their gains.

The ideal situation for Tuesday would be a sharp drop at the open with the Dow down over 200 points and then a V bottom reversal back to positive territory. The drop would scare the weak holders out of the market and for everyone else their stop losses would be triggered. The thousands of buyers waiting on the sidelines because they could not force themselves to buy such a grossly overextended market, would rush in to buy the dip and the market could begin a new leg higher.

That would be a perfect world. Unfortunately, that rarely happens the way we would like to see it happen. We could just continue to chop around here for several days like the Dow did the prior week when it only gained 20 points for the week.

The Russell 2000 broke its string of consecutive gains at 15 days and could stand a couple more days of retracement before buyers begin to open new positions. It would be ridiculous to expect only one or two days of minor declines to compensate for the 16.5% of gains over the last three weeks.

The Russell chart is a picture of what is wrong with the market. The other indexes look the same only not quite as dramatic. I would be prepared for continued volatility the rest of the week despite my perfect world scenario.

Because of the market conditions and the holiday interruption last week we got off the regular publishing schedule. I am not going to produce another newsletter this Wednesday. There would not be enough of a change in conditions in 48 hours to justify the effort. The regularly scheduled newsletter will return the following Wednesday.

I spent several hours today researching potential plays and provided a huge list for your review and selection. I do not just pick those additional plays out of a hat. I research every one for news, chart, earnings dates, option prices, etc. That is not a machine generated list. There are plenty available to keep even the most active trader busy over the next several days.

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.

Lines in blue were previously closed.

Current positions

Covered Calls

Monthly Cash Machine

November Position Recap

Because of the volatility in late October and early November only had a few positions in the November strikes. After a rocky October series, I was reluctant to load up a lot of positions with the pre election uncertainty driving the market. I would rather not risk capital if we do not have at least a general idea about market direction and that limited our losses in the November cycle.

Current Option Writer Position Changes

LLY - Eli Lilly (Short Closed)

We were hammered again when Lilly reported their late-stage Alzheimer drug failed to improve patients with mild to moderate symptoms. There were high hopes for this drug and the damage to the stock was ugly. Shares dropped -$12 at the open on Wednesday to stop us out on a monster gap up in price on the short option. Because traders do not know where the stock drop is going to end they jack up the price of the options to protect themselves. Unfortunately, there is no way to know when these things are going to happen.

Closed Dec $70 short put, entry $1.57, exit $6.65, -5.08 loss.
Retain Dec $60 long put, entry .37, currently .11.

Monthly Cash Machine Play Updates

XBI - Biotech ETF (Long Closed)

When LLY shares collapsed -$12 on Wednesday, the XBI also collapsed at the open to stop us out on the long side at $64.25. The ETF quickly rebounded to erase the dip but the damage was done.

Closed Dec $72 long call, entry .11, exit .15, +.04 gain.

Previously closed Dec $67 short call, entry .51, exit .60, -.09 loss.
Net loss 5 cents.

New Option Writer Recommendations

TSLA - Tesla Inc (January Put Spread)

Tesla has completed the acquisition of SolarCity and all that uncertainty is now behind them. Shares have been trending higher since the vote on the 17th. The $180-$185 level has been support in the past.

Earnings Jan 25th.

Sell short Jan $170 put, currently $2.70, stop loss $183.50
Buy long Jan $150 put, currently $.98, no stop loss.
Net credit $1.72.

INCY - Incyte Corp (January Call Spread)

Shares of INCY have been trending higher but they have a strongly repetitious pattern of peaks and valleys over the last year. The current spike has stalled and we should see another valley appear. Shares have hit a strong resistance range from $100-$118 and further gains could be difficult without some profit taking.

Earnings Jan 31st.

Sell short Jan $120 call, currently $2.00, stop loss $112.25
Buy long Jan $140 call, currently .90, no stop loss.
Net credit $1.10.

ANET - Arista Networks (January Naked Put)

Arista has blasted off after they solved their import problems. The stock exploded past $90 and should continue higher.

Earnings Jan 31st.

Sell short Jan $85 put, currently $1.10, stop loss $89.85

WDC - Western Digital (January Naked Put)

WDC finally found some traction in the last couple of weeks and analysts continue to upgrade their estimates. Now that the SanDisk acquisition is well behind them and new products are hitting the market, they are the number one disk drive maker in the market.

Earnings Jan 26th.

sell short Jan $55 put, currently $1.06, stop loss $58.65.

Other Potential Plays (Dec Spreads, Covered Calls, Naked Puts)

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

December expiration is the 16th.

January expiration is the 20th.

New Covered Call Recommendations

No Covered Calls

New Monthly Cash Machine Recommendations

I am terminating the Cash Machine recommendations with the January option cycle. It is difficult to force a play on an index or sector ETF every week just because there is a scheduled newsletter. The market has broken out of its three month trading range and the odds are VERY good we are going to see a lot of volatility in 2017. I will still include spreads on indexes when they are available at an attractive price and the market is cooperating. Those ETF spreads will be presented in the regular Option Writer recommendations.

IWM - Russell 2000 ETF (January Put Spread)

The Russell has lost touch with reality and posted 15 consecutive days of gains. Monday was a 1% loss to break that streak. However, the economic situation has changed and expectations for a business friendly administration should keep the trend positive over the next several weeks even if there are some temporary dips. I am playing this as far out of the money as possible and still have the targeted 30 cent credit.

Sell short Jan $117 put, currently 52 cents, stop loss $125.65
Buy long Jan $110 put, currently 22 cents, no stop loss.
Net credit 30 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.

ACIA - Acacia Communications (December Put Spread)

ACIA has had a rough couple of months. Things are finally improving and the shares hit a 3 week high intraday on Wednesday.

Earnings Feb 9th.

Sell short Dec $60 put, currently $1.20, stop loss $64.85
Buy long Dec $50 put, currently .70, no stop loss.
Net credit .70

CLVS - Clovis Oncology (Covered Call)

Clovis has had some challenges over the last month but the worry over Clinton being elected was the power behind the decline over the last two weeks. Shares rallied 18% on Wednesday. They posted better than expected earnings (loss) last week.

Earnings Feb 2nd.

Buy-write Dec $30 call, currently $32.20-$4.10, stop loss $27.85

CYTR - CytRx Corp (Covered Call)

It is going to be very hard to lose money on this position. It is possible but not likely.

CytRx is a biopharmaceutical research and development company specializing in cancer drugs. They will be presenting three abstracts this weekend at the ASCO cancer conference. Shares have been jumping around between $2 and $3.50 since March. With the conference this weekend the options are high.

Buy-write CYTR July $3 call, currently $2.93-$1.00. No stop loss.

CytRx received some bad news on a drug trial and the stock gapped down to 65 cents. We are waiting for some positive news to inflate the stock and we will sell a new call.

LLY - Eli Lilly & Co (December Put Spread)

Lilly spiked on the election results and has faded slightly as the sector cools. Because of the spike we can sell a put under the prior low and we should be relatively safe.

Earnings Jan 25th.

Sell short Dec $70 put, currently $1.40, stop loss $74.50
Buy long Dec $60 put, currently .40, no stop loss.
Net credit $1.00.

NFLX - Netflix (November Call Spread)

Netflix posted blowout earnings and the stock rocketed to $129 over the next five days but has started to fade. There will probably be some more buying over the next three days for window dressing but I doubt it will be enough to push it significantly higher. The stock has gained $27 or 27% since earnings last week. Funds will be taking profits next week after October is over and they close the books on the 2016 fiscal year.

Earnings Jan 16th.

Sell short Nov $135 call, currently $1.50, stop loss $130.50.
Buy long Nov $145 call, currently .43, no stop loss.
Net credit $1.07.

NTES - Netease (Nov Put Spread)

Netease has a great chart and they just renewed their deal with Activision last week to sell video games in China through 2020. That lifted the shares off $240 and with any positive market, we could see new highs.

Netease has earnings on Nov 15th, 3 days before expiration so we will need to exit early if we ar enot already out.

Sell short Nov $210 put, currently $2.30, stop loss $233.50
Buy long Nov $190 put, currently $1.15, no stop loss.
Net credit $1.15

PXD - Pioneer Natural Resources (December Put Spread)

Pioneer posted earnings of 13 cents that missed estimates for 17 cents. It was purely low oil prices in Q3 that caused the miss. Revenue fell -47% to $1.186 billion and beat estimates for $1.022 billion. They produced 239,000 Boepd, a 13.3% increase. They are the lowest cost producer in the Permian and my top pick in the energy space. Shares fell $13 on earnings but have nearly regained all of that loss.

Earnings Jan 31st.

Sell short Dec $165 put, currently $2.70, stop loss $168.85
Buy long Dec $145 put, currently $1.25, no stop loss.
Net credit $1.45.

Update 11/17/16: We were stopped out of the short side on this put spread when PXD crashed $13 from the Thursday high at $181.50 to the $168.79 low on Friday. That was a $13 drop caused by a sharp drop in oil prices to trade at $42.20 and a three-month low. The speed of the drop rapidly inflated the premiums and we lost $2 on the exit.

I am recommending we reload the Dec $165 short put, currently $2.55.

Closed Dec $165 short put, entry $2.92, exit $5.00, -2.08 loss

Sell short Dec $165 put, currently $2.55, stop loss $171.50.

SINA - Sina Corp (November Put Spread)

Sina has flat lined in the $75-$80 range for the last 6-weeks with a very slight upward bias. Analysts are sharply raising Sina price targets because of the company's ownership stake of Weibo Corp (WB) often called China's Twitter. Weibo had 318 million active users at the end of July and will probably have more than Twitter when they next report. Brean Capital just raised the price target on SINA from $65 to $100 to account for the increase in Weibo. WB shares have risen from $12 to $52 since February.

Earnings Nov 17th. One day before Nov options expire.

Sell short Nov $70 put, currently $1.38, stop loss $73.50
Buy long Nov $60 put, currently .36, no stop loss.
Net credit $1.02.

TREE - Lending Tree (December Put Spread)

TREE posted good earnings but the revenue was just under the estimates. The stock sold off hard but has rebounded for the last four days in a weak market. Banks and mortgage companies should do well heading into December with the Fed pointing to a potential December rate hike.

Earnings Dec 27th.

Sell short Dec $70 put, currently $1.40, stop loss $74.85
Buy long Dec $60 put, currently .60, no stop loss.
Net credit $.80.

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.

IBB - Ishares Biotech ETF (Nov Put Spread)

The IBB is testing resistance at $300 and a lot of the political negativity is already prices into the market. We already have a November XBI spread but the biotechs are the only ETFs that have any option premiums. I am picking a strike well out of the money, which should be relatively safe if that is possible in this market.

Sell short Nov $250 put, currently $1.30, stop loss $275.00

Buy long Nov $220 put, currently .35, no stop loss.
Net credit 95 cents.

QQQ - Nasdaq 100 ETF (December Put Spread)

The Nasdaq 100 has been the weakest index for the prior week as portfolio managers dumped big cap tech stocks to raise money for banks and industrial stocks. The NDX is starting to rise again and had the biggest gain of all the indexes today. I expect the NDX to continue to outperform as the other indexes face some profit taking.

Sell short Dec $110 put, currently .56, stop loss $113.85
Buy long Dec $103 put, currently .16, no stop loss.
Net credit 40 cents.

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

The debate must have been seen as positive by traders because the futures shot up to +5.50 immediately after it was over. Support on the S&P is 2,120 and that equates to 212 on the SPY. The market has been up for a couple days as we head into the normally bullish end of October the markets should have a positive bias.

Sell short Nov $205 put, currently $1.01, stop loss $210.50
Buy long Nov $197 put, currently .40, no stop loss.
Net credit 61 cents.

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

Despite being stopped out of the November spread, I am going to try and take advantage of the current market volatility to launch a new one. The SPY spiked to $216 on Wednesday and the market direction should still be up although we could continue to see some significant volatility. The low last Thursday was $208.38 and I am recommending a $204/$196 spread. Even if we do get more volatility I think the dips will be bought.

I am only adding one position because of that potential for additional volatility.

Sell short Dec $204 put, currently $1.02, stop loss $210.85
Buy long Dec $196 put, currently .50, no stop loss.
Net credit 52 cents.


XBI - Biotech ETF (December Call Spread)

Clinton is leading and is now assumed to be the winner despite recent gains by Trump. The biotech sector is in serious decline in anticipation of drug price controls if she is elected. With two weeks to go until the election we should see a continued decline in the sector. If she is elected the decline should continue. If Trump pulls out a win the sector should rebound but we can stop out if that happens.

Sell short Dec $67 call, currently .48, stop loss $62.25
Buy long Dec $72 call, currently .14, no stop loss.
Net credit 34 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.