Wednesday, January 04, 2017  10:39:51 PM

Market Confusion

by Jim Brown

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Review prior updates here: 2014  2015  2016  2017  2018 
The market weakness from last week failed to carry over into 2017. The bears are perplexed.

Everyone is so keyed up for 2017 that the first two days of trading have caused some confusion. A significant number of traders expected 2017 to open like 2016 with a massive drop. However, that is not normal. The first two days of January see a large influx of retirement cash into funds and they put that money to work immediately. The last five days of December and the first two days of January are considered the Santa Rally period for that reason. That is now over. The majority of end of year bonus money and retirement funds have already hit the market. The next two days will be critical for market direction.

The major indexes rebounded to their recent highs but none broke out. Volume slacked off slightly to 7.0 billion shares but it was 6:1 advancers over decliners. If this was any other period in the year, the outlook would be very bullish and we would be expecting a breakout to new highs. With all the various factors clouding the market this year, the next two weeks are going to be exciting, one way or another.

The Dow has not yet touched the psychologically important 20,000 level yet and continues to bog down in the resistance from 19,950 to 19,750. A Dow breakout with some momentum behind it would cause some significant short covering across the broader market. Conversely, another breakdown from here could easily see the shorts come back to the market in heavy volume.

The S&P has a similar chart with a nice two-day rebound back to resistance. If the S&P breaks over 2,275 we could see it rocket higher on a strong bout of short covering and price chasing. Everyone expecting a buying opportunity in January is setting in cash and a breakout could convince them to go all in rather than continue waiting.

The most bullish index was the Russell 2000. The Russell gained +2.3% on Wednesday and is right on the verge of a breakout to a new high. If that resistance fails and the Russell sprints higher we will see that short covering I spoke of above.

We have two problems this week. Despite two days of gains, the markets are still below resistance. They could go either direction in a hurry once a trend is established for January. It is hard to make the decision to short puts or calls without a directional market.

Secondly, we are entering the Q4 earnings cycle and there are very few stocks that do not report earnings between now and the February expiration. January expiration is only 12 trading days away so there is no premium left in that cycle. We have to use February and that limits the opportunities.

I would continue to caution readers about picking a market direction before the market actually confirms a direction. It is still a coin toss until we get a couple more days into January. Next week we should know which way the market is headed.

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

NFLX - Netflix (Short closed)

On Friday, Netflix dipped to $123.60 and stopped us out of the position by 5 cents. There was no specific news. This was just big cap weakness on the Nasdaq for the last three days of the year.

I am recommending we resell the $110 put with Netflix at $129 today. We already have the long put and a successful reselling could cover our current loss.

Closed Jan $110 short put, entry $1.92, exit $1.96, -0.04 loss.

Sell short Jan $110 put, currently $1.07, stop loss $124.85.
Retain Jan $100 long put, entry .64, currently .32.

Monthly Cash Machine Play Updates

No Changes

New Option Writer Recommendations

XBI - Biotech ETF

The biotech sector has been in sell mode since mid November and hit a 7-week low last week. Today there was a 4% rally in Biotech Index and a 5% rally in the XBI. There was a double test of support at $59 over the last two weeks. While there is no way to predict what the market/sector is going to do over the next three weeks the first two days of 2017 have been bullish. I am recommending a put spread on the XBI. Since the sector has already sold off, it could see bargain hunting buying on any market decline.

Sell short Feb $56 put, currently $1.01, stop loss $58.85
Buy long Feb $49 put, currently .26, no stop loss.
Net credit 75 cents.

MELI - Mercadolibre (Short Put)

MELI is the largest online retailer in Latin America and they closed at a four-week high on Wednesday. They were recently upgraded by Goldman to buy with a $170 price target. Holiday shopping was probably good for MELI.

Earnings Feb 23rd.

Sell short Feb $150 put, currently $2.00, stop loss $155.50

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.

February 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 (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

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.

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.

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.

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.

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.

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 (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.


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.