Investors are buying bad news as well as good news.
After seven days of choppy trading and two aborted rally attempts the major indexes have broken through that stalemate and appear to be headed higher. Whether they can continue this rally once the big-name earnings are over is another question.
Actually, many of the big-name companies have been struggling. We may be better off when they are no longer driving the market.
The challenge as I have written in my commentaries is the earnings forecast for Q1. As of noon on Thursday it had fallen to only 1.1% growth. When that number turns negative the market is likely to follow. I suspect some cautious souls will be leaving early to beat the rush as soon as the major batch of earnings are over. That makes the week starting on February 11th a potential turning point.
Everyone knows that calling out a specific date means exactly the opposite will happen but that is the most likely week for a turning point.
Back on October first the consensus target for the S&P from 46 analysts was 3,035 for year end 2019. As of Monday, that has fallen to 2,750. The S&P closed at 2,704 on Thursday. That does not leave a lot of room if they are correct. However, most believe we will see higher numbers and then decline back to 2,750 in the fall.
They believe the declining earnings growth, weak global economy, potential for a hard Brexit, Fed policy change and simple market fatigue will be the causes.
The challenge for Friday is the critical resistance on the Nasdaq. The tech stocks have led the rally over the last two days and they have reached a point where they have run out of headlines and out of week. Weekend event risk means all their uncaptured profits are at risk and resistance is going to attract the shorts. Conversely, if the Nasdaq can shake off the more than $80 drop in Amazon after the close and buy that bad news, we could be testing 7,500 early next week.
The FANG stocks are coming back to life but prior reporters are falling into post earnings depression. Nearly everyone on the bottom of the losers list has already reported.
The FANG stocks are back in correlation with FB, AMZN, GOOGL rising as one in regular trading. Amazon fell -82 in afterhours so this chart will look different on Friday.
The tariff sensitive Dow stocks have been supporting the index with the China delegation in Washington for talks the last two days. Many of the Dow components have reported and the index could be facing some early post earnings depression next week.
I would recommend caution about adding new positions. If you have current longs I would let them ride but keep your stops tight. We could be in for a rocky summer if earnings growth continues to decline.
I apologize for not putting out a letter last week. Just after we emailed the Option Investor newsletter, our database server crashed. I could not post content or send emails for 24 hours and we are still limping along and it has been a week. You really appreciate backups when disaster strikes. You also become painfully aware of what was not backed up.
Enter passively, exit aggressively!
Send Jim an email
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
ADBE - Adobe Systems (Short Put)
No specific news on Adobe but the stock dropped with the Nasdaq on Tuesday to stop us out at $238.50.
Closed Feb $230 short put, entry $2.23, exit $2.52, -.29 loss.
NVDA - Nvidia (Short Put)
We were killed on this position. Nividia announced an earnings warning before the open on Monday and fell $29 in the opening print. This was a massacre. The gap lower caused the stock to open below our stop loss and we were stopped at the open.
Closed Feb $135 short put, entry $2.00, exit $7.00, -4.00 loss.
NFLX - Netflix (Mar Short Put)
Netflix beat on earnings and posted strong guidance but it was not enough for some traders. Shares have declined from $360 to $340 but they are ticking slowly higher. All the bad news is priced in and with their new price increase the CEO said the cash burn would stop in 2020. By then they will have another 50 million or more subscribers at $10 a month and nearing a total of 200 million. That is $2 billion a month in basic revenue. Shares should move higher from here market permitting
Sell short March $280 Put, currently $2.66, stop loss $317.50.
IWM - Russell 2000 ETF (Mar Put Spread)
The Russell just broke out over some decent resistance and appears to be starting a new leg higher. The tech rally has lit the fuse and the small caps will begin reporting next week. The Chinese trade deal appears to be progressing and the Fed is on hold for the time being. The "mostly" positive earnings have erased some of the fears about a recession. The market should move up from here, but we still have the slower earnings growth to deal with over the next several weeks. With the breakout, this could be a good spot to put on a low volatility spread.
Sell short Mar $140 Put, currently $1.05, stop loss $144.85.
Buy long Mar $134 Put, currently .55, no stop loss.
Net credit 50 cents.
PANW - Palo Alto networks (Mar Short Put)
Shares are moving up nicely from the December low and the stock received three upgrades last week. UBS moved from neutral to buy and BMO Capital moved from market perform to outperform. Wedbush upgraded from neutral to outperform and raised the price target from $225 to $265. Analysts believe the continued flurry of cyber attacks will not decline and only get worse over time. The demand for Palo Alto products is only going to grow.
Earnings February 28th.
Sell short March $190 Put, currently $2.54, stop loss $203.85.
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.
ADBE - Adobe Systems (Feb Short Put 1/17)
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.
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.
NVDA - Nvidia (Feb Short Put 1/17)
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.
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.
TREE - Lendingtree Inc (Feb Short Put 1/17)
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.
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.