Sunday, January 01, 2017  12:35:10 AM

Cracks Appearing

by Jim Brown

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Review prior updates here: 2014  2015  2016  2017 
The previously indestructible market is starting to show some cracks as 2017 approaches.

The Dow continues to try and reach that 20,000 level with only a 19 point miss on Wednesday but that was at the open and it was all downhill from there to close at the lows for the day. The Nasdaq posted a 49 point loss after making a new high on Tuesday. The Russell 2000 lost 1.2% and the biggest decliner for the day to end right on support.

There are multiple factors weighing on the market including the pension fund rebalance on Thr/Fri. Credit Suisse said there could be between $38 and $58 billion in stock for sale as pension funds rebalance to their required ratios of bonds and stocks. That should be a stiff headwind over the next three trading days.

Despite the bullish market of late, equity funds saw their 41st consecutive week of outflows according to Lipper. Once the calendar turns over and the tax implications for selling move out another 12 months, there should be even more outflows.

Portfolio managers are counting the hours until 2016 ends so they can sell their winners and take profits to reinvest for 2017.

The next three weeks could be rocky. Put premiums are high but we do not want to sell puts in a declining market. Call premiums are minimal with the exception of a few stocks. With the markets rolling over I was able to pull a few potential plays out of my screen.

I cannot move to February options because of the imminent volatility and the beginning of the Q4 earnings cycle. More than 50% of S&P stocks have earnings before February expiration.

The Dow failed to hit 20,000 after two solid weeks of trying. Resistance held and once it appears the effort is over, those sellers could begin to chase prices lower. For the last two weeks they were confident enough to wait for a move over 19,950 to begin "distributing" stock to those buyers still expecting higher highs. Once that strategy no longer works they will chase prices lower in order to capture profits.


The S&P failed at downtrend resistance and closed at a two-week low under support at 2,250. This party is about to be over.


I would continue to suggest readers step away from the market until we see what January brings. In January 2016, the Dow fell more than 2,000 points with no warning. This year there has been a significant rally into year-end and there is a potential headline disaster with the inauguration. I am not predicting a repeat but I do think we will see a sharp decline.

Dow - January 2016

Jim Brown

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Current Portfolio


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 positions

Covered Calls

Monthly Cash Machine



Current Option Writer Position Changes


No Changes


Monthly Cash Machine Play Updates


IWM - Russell 2000 ETF (Short Closed)

The market drop on the 22nd was just enough to stop us out at $135.45 on the short side of the IWM. The long put is still open but has almost no chance of becoming valuable unless the market implodes.

Closed Jan $117 short put, entry .48, exit .08, +.40 gain.
Retain Jan $110 long put, entry .21, currently .02.



QQQ - Nasdaq 100 ETF (Short Closed)

The market drop on the 22nd was just enough to stop us out at $119.75 on the short side of the QQQ. The long put is still open but has only a slim chance of becoming valuable unless the market implodes.

Closed Jan $110 short put, entry .50, exit .15, +.35 gain.
Retain Jan $104 long put, entry .19, currently .03.



New Option Writer Recommendations


SPY - S&P-500 ETF (Call Spread)

All the signs are pointing to an end of year drop in the markets and the potential for an ugly January until after the inauguration. I believe the market has peaked for at least the next four weeks. If the new president is sworn in without a mishap or terror event, the market should rally strongly out of the January decline.

This is a February strike because there was no premium in January.

Sell short Feb $230 call, currently $1.41, stop loss $227.65
Buy long Feb $235 call, currently $0.42, no stop loss.
Net credit 99 cents.



Other Potential Plays (Spreads, Covered Calls, Naked Puts)

These are not official plays but a good place to start if you are looking for something else to trade.

January expiration is the 20th.



New Covered Call Recommendations


No Covered Calls


New Monthly Cash Machine Recommendations


I am terminating the Cash Machine recommendations with the January option cycle. It is difficult to force a play on an index or sector ETF every week just because there is a scheduled newsletter. The market has broken out of its three month trading range and the odds are VERY good we are going to see a lot of volatility in 2017. I will still include spreads on indexes when they are available at an attractive price and the market is cooperating. Those ETF spreads will be presented in the regular Option Writer recommendations.


No New Recommendations


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.


ACIA - Acacia Communications (December Put Spread)

ACIA has had a rough couple of months. Things are finally improving and the shares hit a 3 week high intraday on Wednesday.

Earnings Feb 9th.

Sell short Dec $60 put, currently $1.20, stop loss $64.85
Buy long Dec $50 put, currently .70, no stop loss.
Net credit .70

 


ACIA - Acacia Communications (January Put Spread)

The Nasdaq decline in late November pushed ACIA down to $64.50 where the stock came to a dead stop. That is slightly higher than the $62.65 low in early November. I believe that is going tobe strong support if we should get another bout of market weakness.

Earnings Feb 9th.

Sell short Jan $60 put, currently $1.75, stop loss $66.85
Buy long Jan $50 put, currently .55, no stop loss.
Net credit $1.20.


ANET - Arista Networks (January Naked Put)

Arista has blasted off after they solved their import problems. The stock exploded past $90 and should continue higher.

Earnings Jan 31st.

Sell short Jan $85 put, currently $1.10, stop loss $89.85


CLVS - Clovis Oncology (Covered Call)

Clovis has had some challenges over the last month but the worry over Clinton being elected was the power behind the decline over the last two weeks. Shares rallied 18% on Wednesday. They posted better than expected earnings (loss) last week.

Earnings Feb 2nd.

Buy-write Dec $30 call, currently $32.20-$4.10, stop loss $27.85


CYTR - CytRx Corp (Covered Call)

It is going to be very hard to lose money on this position. It is possible but not likely.

CytRx is a biopharmaceutical research and development company specializing in cancer drugs. They will be presenting three abstracts this weekend at the ASCO cancer conference. Shares have been jumping around between $2 and $3.50 since March. With the conference this weekend the options are high.

Buy-write CYTR July $3 call, currently $2.93-$1.00. No stop loss.

CytRx received some bad news on a drug trial and the stock gapped down to 65 cents. We are waiting for some positive news to inflate the stock and we will sell a new call.


INCY - Incyte Corp (January Call Spread)

Shares of INCY have been trending higher but they have a strongly repetitious pattern of peaks and valleys over the last year. The current spike has stalled and we should see another valley appear. Shares have hit a strong resistance range from $100-$118 and further gains could be difficult without some profit taking.

Earnings Jan 31st.

Sell short Jan $120 call, currently $2.00, stop loss $112.25
Buy long Jan $140 call, currently .90, no stop loss.
Net credit $1.10.


LLY - Eli Lilly & Co (December Put Spread)

Lilly spiked on the election results and has faded slightly as the sector cools. Because of the spike we can sell a put under the prior low and we should be relatively safe.

Earnings Jan 25th.

Sell short Dec $70 put, currently $1.40, stop loss $74.50
Buy long Dec $60 put, currently .40, no stop loss.
Net credit $1.00.


NFLX - Netflix (January Put Spread)

Netflix surged after getting an upgrade from Evercore ISI saying expected competition had not appeared and they now had a lead in original content that was insurmountable. Shares should retest resistance at $130.

Earnings Jan 16th.

Sell short Jan $110 put, currently $2.00, stop loss $115.85
Buy long Jan $100 put, currently .70, no stop loss.
Net credit $1.30.


PXD - Pioneer Natural Resources (December Put Spread)

Pioneer posted earnings of 13 cents that missed estimates for 17 cents. It was purely low oil prices in Q3 that caused the miss. Revenue fell -47% to $1.186 billion and beat estimates for $1.022 billion. They produced 239,000 Boepd, a 13.3% increase. They are the lowest cost producer in the Permian and my top pick in the energy space. Shares fell $13 on earnings but have nearly regained all of that loss.

Earnings Jan 31st.

Sell short Dec $165 put, currently $2.70, stop loss $168.85
Buy long Dec $145 put, currently $1.25, no stop loss.
Net credit $1.45.

Update 11/17/16: We were stopped out of the short side on this put spread when PXD crashed $13 from the Thursday high at $181.50 to the $168.79 low on Friday. That was a $13 drop caused by a sharp drop in oil prices to trade at $42.20 and a three-month low. The speed of the drop rapidly inflated the premiums and we lost $2 on the exit.

I am recommending we reload the Dec $165 short put, currently $2.55.

Closed Dec $165 short put, entry $2.92, exit $5.00, -2.08 loss

Sell short Dec $165 put, currently $2.55, stop loss $171.50.


SIG - Signet Jewelers (January Naked Put)

The fourth quarter is normally the best quarter of the year for jewelers and Signet is moving to a 7 month high. Support at $90 in early December was decent and the stock is accelerating higher.

Earnings Feb 21st.

Sell short Jan $85 put, currently $1.40, stop loss $90.45.


TSLA - Tesla Inc (January Put Spread)

Tesla has completed the acquisition of SolarCity and all that uncertainty is now behind them. Shares have been trending higher since the vote on the 17th. The $180-$185 level has been support in the past.

Earnings Jan 25th.

Sell short Jan $170 put, currently $2.70, stop loss $183.50
Buy long Jan $150 put, currently $.98, no stop loss.
Net credit $1.72.


TREE - Lending Tree (December Put Spread)

TREE posted good earnings but the revenue was just under the estimates. The stock sold off hard but has rebounded for the last four days in a weak market. Banks and mortgage companies should do well heading into December with the Fed pointing to a potential December rate hike.

Earnings Dec 27th.

Sell short Dec $70 put, currently $1.40, stop loss $74.85
Buy long Dec $60 put, currently .60, no stop loss.
Net credit $.80.


WDC - Western Digital (January Naked Put)

WDC finally found some traction in the last couple of weeks and analysts continue to upgrade their estimates. Now that the SanDisk acquisition is well behind them and new products are hitting the market, they are the number one disk drive maker in the market.

Earnings Jan 26th.

sell short Jan $55 put, currently $1.06, stop loss $58.65.


Existing Monthly Cash Machine Positions

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.


IWM - Russell 2000 ETF (January Put Spread)

The Russell has lost touch with reality and posted 15 consecutive days of gains. Monday was a 1% loss to break that streak. However, the economic situation has changed and expectations for a business friendly administration should keep the trend positive over the next several weeks even if there are some temporary dips. I am playing this as far out of the money as possible and still have the targeted 30 cent credit.

Sell short Jan $117 put, currently 52 cents, stop loss $125.65
Buy long Jan $110 put, currently 22 cents, no stop loss.
Net credit 30 cents.


QQQ - Nasdaq 100 ETF (December Put Spread)

The Nasdaq 100 has been the weakest index for the prior week as portfolio managers dumped big cap tech stocks to raise money for banks and industrial stocks. The NDX is starting to rise again and had the biggest gain of all the indexes today. I expect the NDX to continue to outperform as the other indexes face some profit taking.

Sell short Dec $110 put, currently .56, stop loss $113.85
Buy long Dec $103 put, currently .16, no stop loss.
Net credit 40 cents.


QQQ - Nasdaq 100 ETF (January Put Spread)

The Nasdaq corrected almost 4% the prior week. The Nasdaq 100 has been the lagging index and it appeared to catch fire today with a better than 1% gain. The QQQ has dipped several times over the last two months and the decline halted in the $114-$115 range. I am going to try and sell well under that level in hopes the next several weeks will see the Nasdaq break out to a new high with the rest of the market.

Sell Jan $110 put, currently .50, stop loss $114.85
Buy Jan $104 put, currently .19, no stop loss.
Net credit 31 cents.


SPY - S&P-500 ETF (December Put Spread)

Despite being stopped out of the November spread, I am going to try and take advantage of the current market volatility to launch a new one. The SPY spiked to $216 on Wednesday and the market direction should still be up although we could continue to see some significant volatility. The low last Thursday was $208.38 and I am recommending a $204/$196 spread. Even if we do get more volatility I think the dips will be bought.

I am only adding one position because of that potential for additional volatility.

Sell short Dec $204 put, currently $1.02, stop loss $210.85
Buy long Dec $196 put, currently .50, no stop loss.
Net credit 52 cents.

 


XBI - Biotech ETF (December Call Spread)

Clinton is leading and is now assumed to be the winner despite recent gains by Trump. The biotech sector is in serious decline in anticipation of drug price controls if she is elected. With two weeks to go until the election we should see a continued decline in the sector. If she is elected the decline should continue. If Trump pulls out a win the sector should rebound but we can stop out if that happens.

Sell short Dec $67 call, currently .48, stop loss $62.25
Buy long Dec $72 call, currently .14, no stop loss.
Net credit 34 cents.


Margin Requirements:

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.