We are always just one tweet away from a market rally or a market crash.
I wrote in the weekend commentary that we were more than likely approaching a major short squeeze considering the strongly oversold conditions. I also theorized that Mexican officials would grovel and there was a possibility the tariffs would never be enforced. The officials made all the right statements and President Trump appeared to be conciliatory but continues to keep the pressure on. Negotiators from both countries met on Wednesday but did not reach an agreement. Talks will continue on Thursday but if no agreement is reached the tariffs will begin on Monday June 10th.
Trump has backup support from the data after 144,000 migrants were arrested at the border in May. The problem is growing worse with each passing day. That means an average of 4,625 migrants crossed the border illegally every day.
Offsetting the potential for tariffs on Mexican goods, the Federal Reserve officials suddenly reversed course and appear to be telegraphing future rate cuts to combat the impact of tariffs. The fed funds futures are now predicting a 99.1% chance of a rate cut by January and a 69% chance of two rate cuts.
The oversold markets gapped higher and a major short squeeze was born. However, the odds are not good that there will be an agreement with Mexico. Trump has a powerful weapon that was totally unexpected and Mexico will have to make major changes in immigration enforcement. I do not think they are ready to take that step. These talks could go on for several weeks. I would be thrilled if they worked it out but Trump has the upper hand even though it will hurt US consumers significantly. He may have to implement the tariffs to show he is not bluffing.
This could tank the market again because these will be far more damaging than the Chinese tariffs.
This is just a short squeeze. This is not likely to be a lasting rally. Most major declines have these bear market rallies and until volume dries up and sellers return.
The S&P has rebounded 3.6% in just two days. That should scare anyone considering adding to long positions. Despite the small move over downtrend resistance, we are still in a downtrend. This is just another lower high. There is major resistance at 2,835, 2,868, 2,872, etc. This will not be a cakewalk.
After normal May declines there are decent rebounds in June. However, this was NOT a normal decline. This was totally headline driven and they are getting worse with each new week. We are moving toward the summer doldrums. While we could see a move in either direction or both, the likely direction will be at least a retest of the Monday lows. It is very rare to see a giant V bottom rally.
President Trump will be back in the US soon and the tweet machine will move back into high gear. Be ready.
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
FB - Facebook (July Short Put)
Facebook crashed under the news of a potential probe by regulators. It was not something new but it was confirmation of prior rumors. The news and the market knocked Facebook back to $162 where it was met with heavy buying. Shares rose on Tuesday and Wednesday. This should be decent support. The 200-day average is $161.33 and $161 is also strong horizontal support.
We are currently long this put from a prior transaction. I am recommending we close it and go short.
Earnings July 24th.
Sell short July $155 put, currently $2.50, stop loss $160.50.
CRM - Salesforce.com (July Put Spread)
Salesforce reported record earnings on Tuesday with billings that rose 25% to $2.76 billion and blowing past estimates for $2.21 billion. They raised full year guidance from $2.54-$2.56 to $2.88-$2.90. That was well above street estimates.
Shares gapped nearly $7 and closed at the high for the day. I am proposing a put spread at the June lows because they are not likely to return there.
Sell short July $145 Put, currently $2.13, stop loss $148.25.
Buy long July $135 Put, currently $.97, no stop loss.
Net credit $1.16.
MSFT - Microsoft (July Short Put)
Microsoft crashed back to $119 in the tech wreck, but they are still growing and generating free cash flow that puts them in the top ten on that metric. With new products in the works, new partnerships and a fantastic CEO, the market would have to return to its lows for Microsoft to trade below $120 again.
Sell short July $115 Put, currently $1.20, stop loss $118.50.
STZ - Constellation Brands (July Short Put)
Constellation sold off hard on the initial news over the Mexican tariffs. They are rebounding equally as hard and should not retest their lows again. This was a knee jerk reaction and not a fundamental decision.
sell short July $170 Put, currently $2.50, stop loss $179.50.
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.
AAPL - Apple Inc (July Put Spread 5/30)
Apple has been trashed severely since the high at $215 on May 1st. The stock is severely oversold and has arrived at support at $175. They do have problems with the China tariffs and slowing sales in China, which produced 17% of their revenue last year.
Shares are down -17% in a month and have lost $125 billion in market cap. This is very oversold and analysts are starting to recommend it again at these depressed levels. With further support at $170 we should see buyers hold this level.
Sell short July $160 Put, currently $2.21, stop loss $169.
Buy long July $150 Put, currently $1.12, no stop loss.
Net credit $1.09.
CRM - Salesforce.com (May Put Spread 3/21)
Salesforce.com is another stock that suffered badly after earnings on March 4th. Shares fell from $165 to $150. Over the last two weeks they have completely erased that drop and closed at a new high on Thursday. I wanted to sell a put on it but the premium is not strong enough so I am going to recommend a spread.
Earnings June 3rd.
Sell short May $155 put, currently $2.19, stop loss $160.65.
Buy long May $145 put, currently .94, no stop loss.
Net credit $1.25.
Update 3/28: CRM was hammered after 50 women filed suit against the company saying they built customized apps for prostitution site Backpage.com that allowed pimps and johns to be matched up with them for illicit sex. I have no view on this since it would be a little more personal than suing Microsoft because backpage servers ran Windows software. Customized apps could me a lot of different things to different people. Regardless, shares fell nearly $20 to stop us out.
Closed May $155 short put, entry $2.34, exit $4.00, -1.76 loss.
Retain May $145 long put, entry 1.16, currently $2.51, +1.35 gain. No stop loss.
Update 4/24: Salesforce rebounded sharply after the prior week dip and stopped us out of the long put side of the spread.
Closed May $145 long put, entry $1.16, exit $2.06, +.90 gain.
Previously closed May $155 short put, entry $2.24, exit $4.00, -1.70 loss.
Net loss 80 cents.
Update 5/15: The market crash caused CRM to break below initial support the prior week to stop us otu of the short put. The rebound on Friday stopped us out of the remaining long put.
Closed June $130 long put, entry .91, exit .84, loss 7 cents.
Previously Closed June $145, short put, entry $1.94, exit $2.28, -.34 loss.
CRM - SalesForce.com (June Put Spread 4/24)
We were closed out of our last position in CRM but I am going to try it again. Option premiums are high and there is strong support around $155 on the last three drops. At this point all the bad news should be prices into the stock. Shares spiked last week on news they bought SalesForce.org, a related company and SalesForce Investments. Basically, the parent company is reducing its complexity of having a handful of related businesses and instead fold them into the parent. SalesForce.org sold CRM services to schools, hospitals and non profits.
Earnings June 3rd. We will close before earnings.
Sell short June $145 Put, currently $2.73, stop loss $155.25
Buy long June $130 Put, currently 87 cents, no stop loss.
Net credit $1.86.
Update 5/8: The market crash caused CRM to break below initial support to stop the short side of the put spread.
Closed June $145, short put, entry $1.94, exit $2.28, -.34 loss.
Retain June $130 long put, entry .91, currently .94, stop loss $158.25.
FB - Facebook (July Put Spread 5/29)
Despite all the market volatility and negative headlines Facebook shares have held above $180 since May 14th. Sellers have been exhausted and everyone is waiting for the fine, rumored to be $3-$5 billion. That is chump change for Facebook and the big number is already priced into the stock.
Earnings July 24th.
Sell short July $165 put, currently $2.09, stop loss $178.
Buy long July $155 put, currently .99, no stop loss.
Net credit $1.10.
FIVE - Five Below (June Put Spread 4/24)
FIVE is on a rocket ride to new highs. Analysts are falling all over themselves to upgrade it with higher price targets. We know this vertical ramp will not last forever, but it is not showing any signs of slowing. I am hoping that is what it will do. We will finally see a top and then a sideways consolidation phase while the market decides where it wants to go for the summer.
Earnings June 26th.
Sell short June $130 Put, currently $3.00, stop loss $138.85.
Buy long June $120 Put, currently $1.50, no stop loss.
Net credit $1,50.
Update 5/8: Shares rolled over in a weak market to stop us on the short put.
Closed Jun $130 short put, entry $3.11, exit $4.50, -1.39 loss.
Retain June $120 long put, entry $1.65, currently $2.20, stop loss $140.65.
Update 5/22: We closed the leftover long put at the open on Thursday.
Closed June $120 Long put, entry $1.65, exit $3.70, +2.05 gain.
Previously closed June $130 short put, entry $3.11, exit $4.50, -1.39 loss.
Net gain 66 cents.
FL - Footlocker (June Call Spread 5/1)
Shares are heading lower at a high rate of speed. Basketball is about over and the court shoe selling season goes with it. When the big name players are not on TV every week, the enthusiasm for high dollar shoes fades. Shares closed at a 3-month low on Wednesday.
Earnings May 24th. We will exit before earnings.
Sell short June $62.50 call, currently $1.45, stop loss $60.25.
Buy long June $70 call, currently .40, no stop loss.
Net credit $1.05.
Update 5/15: Foot Locker rallied on Adidas earnings to stop out the short call side of the spread. Retain the long call side just in case the market turns bullish again.
Closed June $62.50 call, entry $1.30, exit $2.30, -1.00 loss.
Retain June $70 call, entry .27, currently .35.
SMH - Semiconductor ETF (July Put Spread 5/29)
The Semiconductor Index rose 49% since the December low but was crushed by the events in China. The worries over tariff issues and slowing demand have erased 18% and pushed the SMH back down to $98 and support for Q4. Huawei is trying to negotiate a settlement that will allow them to do business with the rest of the world. At these levels acquisition rumors are starting to make the rounds again. Cypress Semi spiked 12% on Thursday on acquisition interest.
I could be wrong, but I think we are at a tradable bottom on the Semiconductor Index. I am recommending a put spread in anticipation of some oversold buying. Shares were up today in a bad market.
Sell short July $90 Put, currently $1.49, stop loss $94.85
Buy long July $85 Put, currently 80 cents, no stop loss.
Net credit 69 cents.
THO - Thor Industries (June Call Spread 5/1)
Thor posted a big miss on earnings and the rise in gasoline prices are going to weaken Q2/Q3 as well. Shares closed at a three-week low post earnings and are falling sharply. There is no excitement in the stock in a environment with high fuel costs.
Earnings June 5th.
Sell short June $70 call, currently $1.70, stop loss $68.15.
Buy long June $80 call, currently 30 cents. No stop loss.
Net credit $1.40.
Update 5/29: We closed the short June $70 call at the open last Thursday. The long call remains open but worthless.
Closed Jun $70 short call, entry $1.77, exit .17, +$1.60 gain.
Retain Jun $80 long call, entry .30, currently .05, no stop loss.
URI - United Rentals (June Put Spread 4/24)
United posted earnings of $3.31 that beat estimates for $3.03. Revenue of $2.1 billion was also a beat. The company said we are about to enter our "busy season with the strongest service offering in our history, given the strategic investments we have made in our business, including acquisitions, to best support our customers." Shares spiked $12 and are still moving higher a week later after breaking over resistance at $137.
Sell short June $130 Put, currently $2.50, stop loss $134.50.
Buy long June $120 Put, currently $1.15, no stop loss.
Net credit $1.35.
Update 5/8: Shares of URI rolled over in a weak market to fall back below prior resistance and stop us out of the short put.
Closed June $130 short put, entry $2.40, exit $4.23, -1.83 loss.
Retain June $120 long put, entry $1.60, currently $1.90, stop loss $136.05.
Update 5/22: We closed the leftover long put at the open on Thursday.
Closed June $120 Long put, entry $1.60, exit $2.17, +.57 gain.
Previously closed: June $130 short put, entry $2.40, exit $4.23, -1.83 loss.
Net loss $1.26.
WSM - Williams-Sonoma (June Call Spread 5/1)
The retailer closed at a two month low and appears headed to retest support at $50. Shares rose on an earnings beat but quickly rolled over and the stock and sector are moving lower.
Earnings June 16th.
Sell short June $60 Call, currently $1.10, stop loss $57.50.
Buy long June $65 Call, currently $.40, no stop loss.
Net credit 70 cents.
Update 5/22: WSM rebounded from its long decline on positive earnings in the retail sector. We were stopped on the short call for a minor gain.
Closed June $60 short call, entry $1.28, exit .58, +.70 gain.
Retain June $65 long call, entry .38, currently .15. 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.