The 3-week rally has turned into 4-weeks and investors are still buying the dip.
After five days of early morning declines and afternoon rebounds, the major indexes have clawed their way back to correction territory and are putting those road signs in their rear-view mirror.
The Dow close over its 10% decline level of 24,145 for the last two days. The next major resistance is 25,000 and round number resistance and the 200-day average. Since the Dow does not normally react to moving averages it will be the round number at 25,000 that exerts the most influence.
The Dow got some help on Thursday from the tariff rumors surrounding China. Tariff sensitive stocks Boeing, Caterpillar and 3M raced to the top of the winners list.
The S&P is trying to follow the Dow's lead but could not close over the 2,637 level and the beginning of correction territory. With the futures up +7 tonight, we should get another chance tomorrow. The next material resistance would be 2,700 then multiple levels of convergence at 2740-2750.
The Nasdaq is the laggard. The index is still more than 200 points below its correction territory at 7,298 and that has multiple level of converging resistance. This may be the wall of worry for the index to climb but it is definitely littered with challenges. The FAANG stocks have been alternately up and down but the recent trend is higher and that is supporting the index.
We are at that point in the cycle where 80% of companies, most of the major ones, all report earnings over the next three weeks. That takes them out of contention for possible positions. I went out to late February and looked at all the stocks that had earnings after the February expiration and before the March expiration. It was a skinny list.
We will have to move to the March expiration cycle next week. This is our last shot at February strikes. With the VIX back at 18 and the trend bullish, the put premiums have evaporated to almost nothing. I will happily take the premium decline to see the market recover some of those early December levels.
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
TREE - Lendingtree Inc (Feb Short Put)
Tree has gone vertical and broken out over the Nov/Dec resistance highs at $264. Shares are competing with Netflix for the biggest gain since Christmas with an $88 move. If it breaks out to a 10-month high over $288.40 there is nothing to hold it back from continuing its gains.
Earnings Feb 21st.
Sell short Feb $240 Put, currently $2.00, stop loss $265.65.
ADBE - Adobe Systems (Feb Short Put)
Adobe has broken free of the December decline and it moving up briskly. The close on Thursday was the 200-day average and the 100 is only 2 points higher. While those are resistance, a move over those levels should reach $260 or higher.
Earnings March 14th.
Sell short Feb $230 put, currently $2.71, stop loss $238.50.
NVDA - Nvidia (Feb Short Put)
Nvidia has not been star performer as in the past but it is starting to warm up. Dip buyers have done well but there is a long way to go to recover lost ground. The outlook for the company is great and it suffered with the chip sector on the way down. This company is the future of tomorrow.
Earnings Feb 14th.
Sell short Feb $135 put, currently $3.10, stop loss $145.85.
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.
ADSK - Autodesk (Feb Put Spread 1/10)
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.
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.
INTU - Intuit (Feb Short Put 1/10)
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.
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.
STZ - Constellation Brands (Feb Put Spread 1/10)
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.
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.