The fallout from Apple's earnings warning is long past and bad news is being ignored.
Last week the Dow fell -660 on Thursday as a result of Apple's earnings warning. Sentiment was crushed, and the outlook was grim. The VIX spiked to 26.50 on the market decline. Today the VIX is 19.50 and Apple has rebounded $12 from that $142 closing low. The bad news is being ignored on all but the offending company and then only for a day or two.
This is a symptom of a bull market. The dips are being bought because fund managers are sitting on piles of cash generated by tax loss selling. Now they are rebuilding their portfolios for 2019. The politics are being ignored. The Fed is being ignored after Powell's "patient and flexible" comments last week. Even a three-week partial government shutdown has failed to dent the market.
While everything appears bullish, we are seeing a sudden flurry of earnings warnings. We knew earnings growth was going to slow from the current 22% to something close to 7% in 2019. Companies are telling us that maybe expectations for 22% were optimistic for Q4 and that has the potential to slow the rally.
Macy's (M) was one of the guilty parties on Thursday. They guided for earnings of $3.95-$4.00 on revenue of $24.84 billion and that was down from prior guidance of $4.10-$4.30 and revenue of $25.01 billion. Analysts were expecting $4.09 and $25.04 billion. Macy's shares fell 18% on the news and tanked the entire retail sector.
This is a symptom of the entire market. A random big name disappoints and drops sharply. The only difference between this week and the week before Christmas is that the rest of the sector rebounds sharply as investors decide it is a buying opportunity.
The Dow fell -176 at the open and rebounded to positive territory before lunch. It was a great rebound and anyone looking for a buying opportunity got one. However, the decline was too short. After three weeks of gains we need more than a two hour drop to equalize pressures. However, the pace of the full day rebound was calm and there was no rush to cover shorts or chase prices higher. It was almost a perfect day in the market, but we are still overbought.
The index came to a dead stop at resistance at 24,000. This is going to be a challenge on Friday as well as the 10% correction level at 24,145.
The Nasdaq rebound was weaker with only a 29-point gain to stop just below round number resistance at 7,000. The next major level is the converging resistance at 7,300.
The markets are acting really well and the best path higher would be 2-3 days of minimal gains and losses to consolidate at the current level ahead of earnings. The risk is further guidance problems as more than 250 companies report earnings next week. It would not take more than a handful of big-name companies to really sour sentiment if they disappointed on guidance.
Enter passively, exit aggressively!
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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 Position Changes
INTU - Intuit (Feb Short Put)
Intuit closed at a 4-week high on Thursday after the company announced its shareholder meeting would be on January 17th and would discuss the outlook for the company. This is tax season and Intuit earnings soar as millions of customers order tax forms from the company to use with their Quickbooks software.
Earnings Feb 18th.
Sell short Feb $190 put, currently $2.20, stop loss $198.65.
You could also sell the $190/$180 put spread for an 85 cent credit if you don't want to sell the put.
STZ - Constellation Brands (Feb Put Spread)
Shares were crushed for a $22 loss on Wednesday after the company posted weak guidance. They rebounded $9 on Thursday after the CEO appeared on CNBC saying the report was misconstrued and business was great. Guggenheim upgraded from sell to neutral and Goldman upgraded from neutral to buy. I am recommending we sell the dip.
Earnings April 10th.
Sell short Feb $150 put, currently $2.10, stop loss $155.50.
Buy long Feb $140 put, currently .90, no stop loss.
ADSK - Autodesk (Feb Put Spread)
Autodesk closed at a 4-week high on Wednesday at $137 after a December low of $118. The company had been withstanding the decline rather well until they announced on the 20th that they were acquiring BuildingConnected, a leading construction bid-management platform for $275 million. Buyers almost always decline and while this is probably a good acquisition, there were some naysayers. Shares ahve recovered and premiums are high.
Earnings February 19th.
Sell short Fed $125 put, currently $2.21, stop loss $129.35.
Buy long Feb $115 put, currently $1.11, no stop loss.
Net credit $1.10.
New Covered Call Recommendations
No New Covered Calls
The volatility continues to be high. I am not recommending covered calls this week.
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.
BABA - Alibaba (Feb Short Put 12/27)
Alibaba appears to have bottomed at $130 as long as the market does not roll over again in January. The Feb put premiums are very high because earnings are Feb 1st. This means we will have to exit in late January.
Earnings Feb 1st.
Sell short Feb $120 put, currently $3.20, stop loss $132.25.
Update 1/3/19: The Apple revenue warning and claims that business declined sharply in China over the last two months, hit Alibaba hard and caused a $6 or -4.5% decline on Thursday. This stopped us out just after the open for a breakeven.
Closed Feb $120 Put, entry $3.34, exit $3.35, -.01 loss.
COST - Costco (Feb Short Put 12/27)
Costco bottomed at $190 after reporting earnings on the 13th. The earnings were great but they were picked apart by investors in a massively declining market. The $190 level should be the bottom unless the market rolls over again in January.
Earnings March 14th.
Sell short Feb $180 put, currently $2.24, stop loss $193.25.
CRM - SalesForce.com (Feb Short Put 12/27)
Salesforce has rallied $15 off the bottom at $120 over the last two days. If the market rally continues this will be a rocket back over $150.
Earnings Feb 26th.
Sell short Feb $115 put, currently $2.29, stop loss $124.50.
SHOP - Shopify (Jan Short Put 11/30)
Shopify has rebounded sharply from the November 20th low. Shares have rebounded to their mid November resistance at $151. If the positive market continues, SHOP should also break out and continue higher.
Earnings January 24th.
Sell short Jan $125 Put, currently $3.00, stop loss $138.85.
Update 12/20: SHOP shares were crushed after the company announced a secondary offering of 2.6 million shares.
Closed 12/14: Short Jan $125 put, entry $2.90, exit $4.24, -1.34 loss.
SRPT - Sarepta Therapeutics (Jan Short Put11/30)
Sarepta tested the support of the 200-day average twice in November. Shares have returned to early November resistance at $130. I believe a positive market will allow SRPT to move higher.
Earnings February 7th.
Sell short Jan $105 put, currently $3.05, stop loss $119.35.
Update 12/13: Sarepta fell $10 from Dec 3rd high to the open on Dec 6th to stop us out of the short put.
Closed Jan $105 short put, entry $3.23, exit $4.99, -1.76 loss.
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.