Wednesday, January 11, 2017  11:42:40 PM

This Time It Is Different

by Jim Brown

Click here to email Jim Brown
Review prior updates here: 2014  2015  2016  2017 
Those are the most dangerous five words in trading.

However, this time it may actually be different. I have been urging caution for the last several weeks because of the potential for a sharp decline in January. That decline has not appeared and we are seven trading days into the month. However, the S&P futures are down -7.50 tonight and we could be setting up for a change in direction on Thursday.

I cannot tell you how many times I have seen the market defy conventional wisdom for days on end and once everyone reversed their outlooks, that is when the market reversed.

I wrote in the Premier Investor newsletter tonight that the market was turning bullish. That was the kiss of death. The big rebound on the major indexes after the Trump comments tanked the market, appeared to be a setup for another attempt to test Dow 20,000 on Thursday. If the futures hold overnight there will be a slim chance for that retest.

The Asian indexes are mixed but the Nikkei is down -1.5%. I do not see any specific headlines from Japan but I may have missed them.

The point I need to make is that the market is still confused. We have been moving sideways for four weeks after the monster post election rally in the Dow and S&P. The Nasdaq finally caught up on the strength of the biotech sector and the FANG+Apple stocks.

The biotechs crashed more than 4% after the Trump comments and barely showed any rebound. While they may recover, it may not be immediately.

The market has a tremendous amount of built up profits from the post election rally. Once the bell rings at the top of the market, any potential decline could be dramatic.

There is a 3-day weekend ahead and traders normally tend to lighten up to avoid the risk of something happening to the overseas markets while our markets are closed. Also, the inauguration risk is growing. This story out tonight could have had something to do with the drop in the futures. Massive Security Threats for Inauguration




I went ahead and add two positions BUT I recommend that we do not enter them UNLESS the market opens positive. We should not sell puts in a down market. That should be common sense. If the market opens down on Thursday then wait until Friday. If the market opens down on Friday, cancel the recommendations and I will revise again next Wednesday. There is NEVER a rush to enter new positions. Only enter a position when the market is moving in our favor.

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 past the inauguration.

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


TSLA - Tesla Inc (Short closed)

We closed the short put at the open last Thursday to protect our gains. This erased the loss we had on the first put that was stopped out and we will actually escape with a net gain.

Closed Jan $170 short put, entry $2.80, exit .12, +$2.68 gain.
Expiring Jan $150 long put, entry $1.00, exit .00, -1.00 loss.
Previously closed Jan $170 short put, entry $2.82, exit $4.36, -1.54 loss.
Net gain 14 cents. Not much but better than a loss.



WDC - Western Digital (Short closed)

We closed the short put at the open last Thursday to protect our gains.

Closed Jan $55 short put, entry .97, exit .06, +.91 gain.



SIG - Signet Jewelers (Short closed)

Signet collapsed $9 on the 5th to stop us out at $92.35 on its way to $85. Fortunately, it was a January $85 option and while the premium exploded, we still escaped with a minor gain.

Closed Jan $85 short put, entry $1.50, exit $1.22, +.28 gain.



SPY - S&P-500 ETF (Short closed)

The S&P surged to hit a three-week high on Friday and stop us out by 10 cents. The high was $227.75 and our stop was $227.65. If the Dow succeeds in breaking through 20K and the bank earnings are good, our remaining long call could be worth some money next week.

Closed Feb $230 short call, entry $1.48, exit $1.85, -.37 loss.
Retain Feb $235 long call, entry .44, currently .36.



Monthly Cash Machine Play Updates


No Changes


New Option Writer Recommendations


FDX - FedEx (Naked Put)

FedEx Corp posted lower than expected earnings in mid December and $13 decline in the share price. Support formed at $186 and $188 and shares should continue to rebound in a positive market. From all reports they had a good Q4 and probably did better than UPS.

Earnings March 21st.

Sell short Feb $180 put, currently $1.57, stop loss $185.50



PANW - Palo Alto Networks (Put Spread)

PANW crashed after earnings in November from $165 to $123. After several weeks building a base at that level the stock finally found a friend that surprised everyone. Short seller Citron Research went bullish on PANW on the 5th with a $170 price target. Citron said PANW could have 85% of the Fortune 100 as customers by 2020. More than 60% of their revenue is now recurring subscriptions. Shares popped $11 over the last week on the upgrade. Citron said Bernstein had a report out on them last week that was equally as bullish.

If you are worried about the stop loss being too close, you could buy a January $130 put instead of the stop loss. The put is 40 cents today. If the stock is going to crash it will probably be before the January expiration.

Sell short Feb $130 put, currently $2.05, stop loss $132.75
Buy long Feb $120 put, currently .65, no stop loss.
Net credit $1.40



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.


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


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.


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.


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.