The first draft of the tax reform proposal is due out on Thursday. Since all the good points are already priced into the market, the reveal of all the previously unknown bad points could cause a sell the news event in the market. The major indexes are already showing weakness and despite the intraday highs, there was a lot of selling.

The Dow rallied 140 points at the open and fell back intraday to a gain of only 10 points. A small buy program late in the afternoon rescued the index from possibly closing lower. The Nasdaq rallied to a new record high in the morning but also rolled over to close 45 points off its high with a loss of 11 points. The Russell 2000 has traded below prior support at 1,500 for the last 8 days and the volatility is increasing with a 10 point loss on Wednesday.

The S&P spiked to a new intraday high but also faded in the afternoon to post only a minor gain. The index has support at the 2,555-2,565 level.

The Dow has resistance at 23,470 that has held for over a week. Many of the individual Dow components are up 50-70% for the year and they are due for some profit taking. If there are too many negatives in the tax proposal, this could be the week that profit taking appears. Initial support on the Dow is 23,257 and then a long drop back to 22,275.

The Nasdaq big cap stocks surged after earnings last week thanks to some monster short squeezes. Those stocks are now tired and starting to show signs of profit taking from those gains. We are entering the post earnings depression phase where investors take profits and then decide where to put their money for the rest of the quarter. Nasdaq support is back at 6,560.

We had a brief period of selling right at 10:PM when the S&P futures dropped more than 11 points in about a 20 min period. I do not know what caused it but they are slowly rebounding. This is the kind of unexpected volatility you get at a market top because every little thing causes a knee jerk reaction by investors.

I would be careful about adding any long positions and should the market open sharply lower on Thursday, I would not enter the new put spread positions. There is always another day to trade if you have money in your account.

Enter passively, exit aggressively!

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

Leftover Stock

Current Position Changes

BITA - (Put Spread)

The market decline on the prior Wednesday caused us to be stopped out on the short side on the BITA put spread. I did not foresee BITA collapsing back to $35 so I recommended we close the long put at the open on Thursday.

Closed Nov $45 short put, entry $1.35, exit $1.50, -.15 loss.
Closed the Nov $35 long put, entry .27, exit .23, -,04 loss.
Net loss 19 cents.

ADBE - Adobe Systems (Dec Call Spread)

Adobe shares were fading from the post guidance spike when I recommended the call spread last week. The decline ended with a sharp rebound and we were stopped out on the short call position. We still have a long December call and if Adobe breaks out of its current range, we could profit from that position. If Adobe rolls over to $170 again I will resell another short call.

Closed Dec $185 short call, entry 2.02, exit 2.90, -.88 loss.
Retain Dec $195 long call, entry .89, currently .90, no stop loss.

DPZ - Domino's Pizza (Dec Put Spread)

Papa John's (PZZA) reported earnings on Tuesday after the bell and disappointed on revenue. The CEO blamed the current NFL protest scenario on the weak sales. People are not watching the games and therefore they are not ordering pizza to eat during the game. The CEO blasted the NFL for a lack of leadership.

Domino's shares fell $6 intraday on Wednesday on worries their sales had fallen as well. We were stopped out on the short put.

Closed Dec $175 short put, entry $2.42, exit $3.70, -1.28 loss.
Retain Dec $165 long put, entry $1.17, currently 1.90. No stop loss.

New Recommendations

NFLX - Netflix (Dec Call Spread)

Shares have stalled since their blowout earnings and are trading sideways. With the markets looking top heavy it may be hard for Netflix to break through that $200 level.

Earnings January 17th.

Sell short Dec $215 call, currently $2.59, stop loss $203.50.
Buy long Dec $225 call, currently $1.34, no stop loss.
Net credit $1.25.

GS - Goldman Sachs (Dec Put Spread)

Goldman and the rest of the banks should continue to trend higher with the Fed on track to hike rates again in December. Every quarter point hike in rates adds billions to their profits.

Earnings January 16th.

Sell short Dec $230 put, currently $2.18, stop loss $238.50.
Buy long Dec $220 put, currently $1.06, no stop loss.
Net credit $1.12.

LRCX - Lam Research (Dec Put Spread)

LRCX has been on a roll with a $50 gain over the last three months. With the chip sector hot and every electronic device requiring a handful of chips, the sector is not likely to cool too rapidly. They beat on earnings and raised guidance.

Earnings January 16th.

Sell short Dec 185 put, currently $2.55, stop loss $195.65.
Buy long Dec $170 put, currently $1.05, no stop loss.
Net credit $1.50.

New Covered Call Recommendations

No Recommended Covered Calls

Check out the additional plays graphic for multiple potential positions.

Other Potential Plays (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.

November expiration is the 17th. December expiration is the 15th.

Existing 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.

AAP - Advance Auto Parts (Nov Call Spread)

AAP ran off a cliff on October 4th and fell from $99 to $89 over the following week. Raymond James downgraded it from strong buy to market perform or the equivalent of a hold. The analyst said there were execution risks in the firm's current restructuring plan and they could lose market share if it was not done perfectly.

Earnings Nov 14th, before expiration.

Sell short Nov $100 call, currently $1.10, initial stop loss $95.25.
Buy long Nov $110 call, currently .35, no stop loss.
Net credit .75.

ADBE - Adobe Systems (Nov Short Put)

Adobe was crushed after earnings for only reporting revenue guidance that was up 25% but in line with analyst estimates. Shares were knocked from $157 to $144 and they are rebounding.

Earnings Dec 19th.

Sell short Nov $135 put, currently $1.06, stop loss $143.65.

Update 10/18/17:

ADBE - Adobe Systems (Short Put)

We were stopped on the short put when Adobe fell $5 on Monday after Deutsche Bank downgraded them from buy to hold. Adobe will get the last laugh. After the bell today shares spiked to $163 after the company raised guidance significantly.

Closed Nov $135 short put, entry $1.18, exit .37, +.81 gain.

ADBE - Adobe Systems (Dec Call Spread)

Adobe shot up $20 on raised guidance for 2018 at their investor day. This was a monster short squeeze and while it may not decline to fill the gap it should at least return to the mid $160s and uptrend support. The odds are slim that is will suddenly power higher to $185.

Sell short Dec $185 call, currently $1.72, stop loss $176.50.
Buy long Dec $195 call, currently .71, no stop loss.
Net credit $1.01.

BITA - Bitauto Holdings (Nov Put Spread)

BITA has been moving steadily higher and approaching $54. They reported a 57% increase in revenue to $329.2 million. Net income increased 17.2%. Adjusted income rose 62.9%. It was a great quarter for BITA.

Earnings Nov 14th, before expiration.

Sell short Nov $45 put, currently .90, stop loss $48.65.
Buy long Nov $35 put, currently .15, no stop loss.
Net credit 75 cents.

Update 11/1/17: The market decline on the prior Wednesday caused us to be stopped out on the short side on the BITA put spread. I did not foresee BITA collapsing back to $35 so I recommended we close the long put at the open on Thursday.

Closed Nov $45 short put, entry $1.35, exit $1.50, -.15 loss.
Closed the Nov $35 long put, entry .27, exit .23, -,04 loss.
Net loss 19 cents.

DPZ - Domino's Pizza (Dec Put Spread)

Domino's reported decent earnings but same store sales of 8.4% that beat estimates but was well below the 13.8% comp in the year ago quarter. Earnings were $1.27 and beat estimates for $1.22. Earnings rose 19.5% and revenue rose 13.5%. Anybody would love to have those stats and the sell off was overkill. Shares are starting to rebound from initial support.

Sell short Dec $175 put, currently $2.40, stop loss $179.85.
Buy long Dec $165 put, currently $1.15, no stop loss.
Net credit $1.25.

HD - Home Depot (Oct Put Spread)

Home Depot spiked on the hurricane news but faded after Irma passed. With Maria crushing Puerto Rico and the potential for Jose and Maria to hook up on the East Coast, there could be plenty of damage left to repair in the months ahead. Home Depot is poised to see up to $1 billion in additional sales from the hurricanes.

Earnings Nov 14th.

Sell short Nov $150 put, currently $1.57, stop loss $155.50.
Buy long Nov $140 put, currently $.50, no stop loss.
Net credit $1.07.

Update 10/18/17:

HD - Home Depot (Put Spread)

HD lost its upward momentum once all the hurricanes were off the radar. The short call was stopped at $163.65 on Monday.

Closed Nov $150 short put, entry $1.50, exit .39, +1.11 gain.
Retain Nov $140 long put, entry .44, currently .09. No stop loss.

MU - Micron (Covered Call)

Micron is headed for $50. The trend is strong. They announced a secondary offering two weeks ago that blunted the rally but the offering closed successfully and shares are retesting the highs. They announced today they are going to retire $2.25 billion in debt using the proceeds of the secondary and cash on hand.

Earnings Dec 26th.

Buy-write Nov $42 call, currently $41.31 - $1.46, stop loss $39.50.

NFLX - Netflix (Dec Call Spread)

Netflix posted outstanding earnings and subscriber growth but shares immediately fell back from their record highs. Investors are struggling with the 188 PE and $7 billion in content spend for 2018. It may be time for this stock to rest.

Sell short Dec $210 call, currently $3.15, stop loss $203.50
Buy long Dec $225 call, currently $1.22, no stop loss.
Net credit $1.93.

NKTR - Nektar Therapeutics (Nov Covered Call)

Nektar closed at a new high after they announced they were presenting seven abstracts at the November 10-12th Society for Immunotherapy of Cancer 32nd Annual Meeting. When abstracts are accepted for presentation, they usually have some new information that is relative for a new drug and the cancer field. Shares should continue higher.

Earnings are Nov 8th so we need to exit this position before expiration.

Buy-write Nov $25 call, currently $24.91-$1.90, stop loss $22.50.

NVDA - Nvidia (9/20 Oct Short Put)

Nvidia spiked to $185 after an analyst raised his price target to $250. Shares are holding at that level and are likely to fade slightly before moving higher. The odds of them returning to $155 are nearly zero.

Earnings Nov 9th.

Sell short Nov $155 put, currently $2.23, stop loss $166.
Buy long Nov $140 put, currently $.92, no stop loss.
Net credit $1.31.

NVDA - Nvidia (Nov Put Spread)

I hate to keep going back to Nvidia and Netflix but they always have the best available premiums and I am confident their trends will remain positive long-term.

Earnings Nov 9th.

Sell short Nov $150 put, currently $2.72, stop loss $165.85
Buy long Nov $135 put, currently $1.04, no stop loss.
Net credit $1.68.

PRTK - Paratek Pharmaceuticals

Paratek soared on Aug 23rd when news leaked out the company was considering a sale. They have several great drugs in the pipeline and apparently several other companies have approached them about an acquisition. There is no guarantee and should they announce there is no sale imminent the gains could evaporate just as quickly. They are in a good position for a sale and already have a marketing partnership with Allergan.

As in trader, you have to weigh the potential $5.30 in gains against a potential drop back to $20.

Earnings Nov 3rd.

Buy write Oct $30 call, currently $26.55-$1.85, stop loss $23.65.
Gain if called $5.30.

RH - RH Inc (Nov Short Put)

RH reported earnings of 65 cents that beat estimates of 47 cents. Shares spiked from $50 to $70 and shorts were squeezed until they popped. After 3 weeks of trading sideways and consolidating those gains, the stock has begun to move higher over the last three days.

Earnings Nov 30th.

Sell short Nov $65 put, currently $2.20, stop loss $68.85.

RH - RH Inc (Nov Short Put)

RH broke through resistance on Wednesday to close right at a new high. There is strong support at $70.

We already have a short Nov $65 put on RH that we entered last week. There is no reason not to double up since RH is one of the few companies that have any premium on their puts this week. If you did not take the recommendation last week, now you have another chance.

Earnings Nov 30th.

Sell short Nov $65 put, currently $1.45, stop loss $71.50.

SLCA - U.S. Silica Holdings (May Covered Call)

SLCA has found a bottom along with oil prices. Now that refineries are restarting and producing summer fuel blends, oil inventories will decline and prices should rise. This will continue to lift the energy sector. SLCA produces sand for fracking oil wells. Sand prices have doubled over the last 12 months and are expected to go up another 25% by fall. Some analysts are predicting a sand shortage late this year and early 2018. That will lift prices even higher.

Earnings May 24th.

SLCA has solid support at $43 when oil was crashing throughout March. If we are not called we will sell a new call.

Buy write SLCA May $50 call, currently $47.84-$2.25, no stop loss.
Net gain if called $4.41.

Update 4/17/17: SLCA shares imploded over the last week along with the price of oil. On Wednesday alone, crude prices fell -$1.83 to knock -$2.34 off the price of SLCA. I am not the least bit worried about SLCA long term. Sand prices have doubled over the last six months and they could double again over the next year. The decline in SLCA shares was directly related to the fall in oil prices and that trend is about over. Refiners are back at work and crude inventories are going to start declining rapidly as they gear up for summer blend fuels. I would not have any problem selling a call or put at this level at this point on the calendar.

We do not have a stop loss on the SLCA covered call because of the calendar bias for oil prices to rise starting in late April through July.

No change in the position.

Update 5/3/17: Covered Call Update: Silica shares have collapsed. The stock has declined $11 in the last two weeks despite strong earnings and stronger guidance. Making the situation worse was a big earnings miss by Emerge Energy Services (EMES) reporting a loss of 38 cents compared to estimates for 34 cents. EMES misses estimates 58% of the time so a miss is not uncommon. However, it does impact the other two stocks in the sector, SLCA and HCLP. Emerge said total sand volumes rose 185% to 1,251,000 tons. We know from other reports that sand prices have doubled over the last six months and are expected to double again over the next six months.

Also, Dan Loeb's hedge fund Third Point is shorting the frac sand distributors. Third Point said there could be a shift from northern white sand to abundant in-basin brown sand. They warned there were new sand reserves being developed and there were significant reserves on the sidelines that had been deactivated during the slump. SLCA debunked all those excuses in their earnings report. They said frac sand revenue rose 161% YoY and 41% from Q4.

Comments from the conference call: Our comments last quarter and other industry capacity expansion announcements have created questions for some investors over the potential future supply and demand balance of sand proppants and the implications for pricing and other industry dynamics. Let me take a few minutes this morning to share some thoughts on how we see this unfolding and why we believe that the sand proppant market fundamentals should say strong for the foreseeable future.

We believe our industry will remain tight in the near future due to 3 main factors: First, our industry must add capacity to meet customers' needs. Our internal estimates and current sell side reports estimate industry sand proppant demand to be about 75 million tons here in 2017, growing to over 100 million tons in 2018, with some estimates as high as 147 million tons.

Our industry will be short capacity and we cannot let sand become the bottleneck for the completions industry. Second, oil sand is not fungible within that 100-million-plus tons of projected 2018 demand. Unlike many industrial products, there is a lot of friction in the sand market for a variety of reasons, including logistics, quality differences and mesh sizes. Therefore, we're on average to see 20% to 25% more total supply than demand before our markets come into balance. So for example, if 2018 demand is 110 million tons, that implies that supply and demand balance around 135 million tons of effective capacity. Today, even after estimated reactivations of idle capacity, our industry will only have approximately 90 million tons of effective capacity, thus leaving a 45-million-ton shortfall versus projected 2018 needs. And third, even all the likely capacity additions that are being talked about are not enough. We think there could be an additional 10 million to 15 million tons of brownfield capacity added in the next 12 to 18 months, including our own expansions and perhaps as much as 20 million to 25 million tons of greenfield capacity being added locally in the Permian. All of which will be needed, if current demand estimates prove accurate. Even if our estimated 35 million tons of potential brownfield and greenfield additions come online, the market will still be short.

Full transcript HERE

I cannot fix the current covered call. I am recommending we close it but call premiums are depressed and I am not going to recommend selling a new $40 call today because that would lock in our loss on the first rebound. We need to wait for the rebound to inflate premiums then sell a new call in the $45 range.

We cannot buy a put to protect against further declines. The put premiums are too expensive. You could close the position, take the loss now and then buy back in when the stock rebounds.

Close May $50 short call, entry $2.40, currently .04, +$2.36 gain.
Retain SLCA shares.

Update 9/13/17: Fortunately, oil prices and energy equities have begun to rise again. SLCA has rebounded $5 over the last two weeks and should continue to rise long term as long as oil prices remain firm in the $50 range. Oil closed at $49.23 today. Saudi Arabia is further reducing exports in an attempt to shore up prices. U.S. producers are reducing rig counts and the IEA increased demand estimates today. Everything is moving in our direction but it may take a long time to get back to where we started.

Update 10/18/17:

SLCA - US Silica (Covered Call)

We have shares of SLCA in the portfolio that were left over from a covered call position that expired out of the money. The stock was rebounding but has now rolled over again. I am recommending we sell another covered call and take our lumps if it is called out. That is currently dead money and not doing us any good. It is better to take the loss and move on to a new position.

Sell short Nov $30 call, currently $1.05, no stop loss.

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.