With everyone on pins and needles waiting for trade news, the lack of news is damaging.
S&P futures are crashing overnight on Tuesday and down -9 as I type this. Asian markets opened lower on worries over the trade talks. This could all reverse by morning but given the failures at various resistance levels, the outlook is worsening.
I have warned for the last couple weeks that we would need a new catalyst to lift us over resistance and retest the prior highs. I have written repeatedly that the trade agreement could be a sell the news event and now it looks like it will be a sell before the news event.
Analysts are noting the slippage of commentary regarding the timeline for a potential photo op between Presidents Trump and Xi in Florida. Originally it was discussed as early March, them mid-March and now late March. The first time somebody says April the bottom could fall out of the market.
Analysts are also pointing out that the longer it takes, the more likely Trump will start giving up on various points in order to get a deal done before he begins campaigning for 2020. Those same analysts are already pointing out different things he will probably give up and how the agreement could end up with just some buying from China on US products.
I am not going to try and read the tea leaves on what will or will not appear in an agreement. I do believe there will be an agreement. Not to have one after all this market turmoil would further crash the markets. Trump cannot afford for that to happen.
One thing we do know is that expectations for a "deal" are already priced into the market. Expectations for various points in the deal are not. If we do get some of the most hotly contested points on intellectual property, it could provide some short-term market lift.
China may not believe there is going to be a big post term result because they announced additional stimulus in the form of tax cuts and infrastructure spending today. If they were confident they were going to get a deal they may not have gone to those extremes ahead of the agreement.
The S&P failed at 2,815 once again on Monday and there was no credible effort to rebound on Tuesday. The S&P traded in a 14-point range and closed almost exactly in the middle of that range. The index has gone sideways since February 19th. Critical support appears to be 2,765 and we have touched that level twice since the 19th with the last time on Monday.
The losing stocks in the Dow are clearly an indication of where traders are worried. Tariff sensitive stocks like MMM, BA and CAT are the biggest losers as hope over a trade agreement starts to unravel. Support at 25,800 held intraday with a drop to 25,611 on Monday for a real shock for bullish traders. Fortunately, a rebound appeared but we had a lower high today. A material decline on Wednesday could begin a major upset.
The Nasdaq remains the most bullish of the major indexes, but it cannot get over resistance at 7,600. With the 200-day at 7,478 and round number support at 7,500 the index is not making any major moves. The FAANG stocks are holding their ground but Apple cannot break free of $175 and until today, Netflix has been struggling. Facebook has surged over the last two days and Alphabet (GOOGL) over the last three days and that is the only thing keeping the Nasdaq at the high end of its range. Facebook gained $9 and Google $41.
The Russell 2000 was the weakest index on Tuesday and since the Russell normally leads both up and down, this is concerning. If the Russell breaks back below the correction territory at 1,566, we could see another leg lower and that would upset the broader market.
The Russell led the big caps higher over the last two weeks, but it has rolled over and could be preparing for leadership in the other direction.
I would recommend caution on long positions over the next couple of weeks. The China trade talks could collapse at any time or they could produce a less than desirable result. With the support of earnings now fading, the trend for early March is flat to slightly down. This normally picks up around expiration Friday as traders prepare for Q1 earnings starting in mid-April. I would recommend being patient until we have more clarity over China or until we near the middle of the month.
Because of the futures decline I am not going to add any new positions today. If the futures continue lower, we would gap down at the open and probably get the worst fills of the day. If the futures reversed to positive after I recommended positions based on the current direction, we would probably be stopped out shortly after the open. We should never open positions in a market that is likely to gap open significantly.
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
NFLX - Netflix
We closed the position on February 20th for a nice gain. Now that shares are weakening we may be able to open a new position in the near future.
Closed Mar $280 Short Put, entry $2.89, exit .25, +$2.64 gain.
PANW - Palo Alto Networks (Short Put)
We closed the position on February 20th for a nice gain. Like Netflix, now that shares are weakening we may be able to open a new position in the near future.
Closed Mar $190 Short put, entry $2.60, exit .04, +$2.56 gain.
IWM - Russell 2000 ETF (Put Spread)
We closed the put spread on March 1st when the premium had evaporated and the Russell momentum slowed.
Closed Mar $140 Short put, entry $1.08, exit .06, +$1.02 gain.
Closed Mar $134 Long put, entry .51, exit .03, -.48 loss.
Net gain 53 cents.
SPLK - Splunk (Short Put)
Splunk dipped on Feb 21st to stop us out at $131.85. We had a good position in progress but would have been hit anyway five days later.
Closed Mar $115 Short put, entry $2.24, exit $1.72, +.52 gain.
ADBE - Adobe Systems (Short Put)
Adobe declined $12 on Monday to knock us out of the position with a decent gain. There was no specific news, but shares cratered with the market ahead of the SalesForce.com earnings.
Closed Mar $240 Short put, entry $3.56, exit $2.15, +$1.41 gain.
ADSK - Autodesk (Short Put)
Autodesk snuck up on me. I missed exiting before the earnings on the 28th. According to the newsletter instructions we should always exit the morning before earnings. That exit would have been at $1.00. If you held over and waited for the stop loss to be hit on Friday, the exit would have been 15 cents. I am taking the worst exit to confirm with the newsletter policies.
Closed 3/1 Mar $135 short put, entry $2.27, exit $1.00, +$1.27 gain.
STZ - Constellation Brands (Short Put)
Constellation issued some weak guidance on the 20th and shares collapsed $12 at 3:PM in the afternoon to stop us out.
Closed Apr $160 Short put, entry $2.40, exit $2.34, +0.06 gain.
No New Positions
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 (Mar Put Spread 2/10)
I play Adobe a lot because they normally have a positive trend and huge option premiums. Shares are right on the verge of a new four month high. I am recommending the $240 put but you could move to the $230 put for a little safer position.
Earnings March 14th.
Sell short Mar $240 Put, currently $3.70, stop loss $249.25.
BABA - Alibaba (Short Put 2/20)
Shares are trading right at post earnings resistance highs and could move higher at any time. The trade talks in Washington could have an impact if they conclude successfully. Shares spiked Tuesday after the company said it increased its stake in China International Capital Corp, the top domestic bank in Hong Kong, by 117 million shares. This makes their total stake worth $230.61 million and they are now the second largest shareholder. This suggests they have some longer-term plans for the bank.
Earnings May 1st.
Sell short Apr $155 put, currently $2.30, stop loss $163.25.
IWM - Russell 2000 ETF (Mar Put Spread 1/31)
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.
NFLX - Netflix (Mar Short Put 1/31)
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.
NVDA - Nvidia (Short Put 2/20)
Nvidia lowered guidance in late January and shares fell from $160 to $131 overnight. They reported earnings on February 14th that was slightly better than their lowered guidance. Shares rallied back over $160. Analysts believe all the bad news is priced in and shares should rise from here. There may be some post earnings depression, but it will probably be bought by those investors that missed the drop to $131.
Earnings May 16th.
Sell short Apr $135 Put, currently $2.43, stop loss $143.65.
PANW - Palo Alto networks (Mar Short Put 1/31)
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.
SPLK - Splunk (Mar Short Put 2/10)
Splunk is a rapidly growing cloud security company that uses AI and machine learnings to allow users to collect, index, search, explore, monitor, correlate, and analyze data regardless of format or source. Shares are making new highs after a rough Q4 .
Earnings February 28th.
Sell short March $115 Put, currently $2.25, stop loss $124.25.
STZ - Constellation Brands (Short Put 2/20)
We just concluded a position on Constellation and the stock still looks like it is headed higher. I have to reach out to an April position to get any premium, but we will close it long before expiration. Earnings are April 10th so we will be out well before then.
Earnings April 10th.
Sell short Apr $160 Put, currently $2.15, stop loss $170.85.
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.