Wednesday, January 18, 2017  10:06:17 PM

Directionally Challenged

by Jim Brown

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Review prior updates here: 2014  2015  2016  2017  2018 
The major indexes are dormant and lack any clear signs of direction.

With the inauguration this Friday and the extreme event risk it entails, the markets are stuck in a sideways trend. I am surprised there is not a greater drift to the downside given the historical post inauguration declines. The last 11 presidential changes have seen an average of -2.6% decline in the S&P over the first 30 days in office.

Our markets are not showing any material indications of an imminent decline despite a multitude of analysts expecting a post inauguration drop. In fact, the S&P and Nasdaq have a positive bias while the Dow and Russell 2000 have a negative bias. It is tough to come up with a coherent game plan when there is divergence and no direction.

The January options expire on Friday and because there is no trend and the VIX is still stuck at 12, there is no premium in the February options. This is a perfect setup for buying calls and puts if you only knew which way the market was going. It is not a good setup to sell premium.

The Q4 earnings cycle kicked into high gear this week and nearly 1,700 companies report over the next two weeks. Even if a company has a great chart, we cannot play them with earnings just a week or two into the future. The Q4 earnings cycle is the most compressed time wise of all the quarters. Companies appear eager to get the year behind them and get started on the New Year.

After the bell today Netflix reported earnings and the stock shot up $10 in afterhours. All the index futures opened the evening session positive and I thought at first this would give us a positive open on Thursday. However, within a couple hours the futures all turned negative, including the Nasdaq futures even with the Netflix gain. The Dow, Nasdaq, S&P and Russell futures are all hugging the flat line at 10:PM ET. Again, no clue as to market direction.

The S&P continues to close near the top of its range while the Dow closed at a two week low at the bottom of its range. Typically, they move together but the Dow is showing weakness because of its big post election ramp on the strength in only 8 stocks.

The Russell 2000 closed at a five-week low below support on Tuesday and managed only a minor rebound on Wednesday. The combination of the Russell and Dow closing at the recent lows should suggest an imminent breakdown. However, the Nasdaq and S&P are counteracting those indications. The Nasdaq has posted gains on 9 of the last 11 days. That streak should be getting tired.

With no market direction we cannot even use positions on the index ETFs. The premiums are so low we would have to sell nearly at the money to have a decent spread. With the pending event risk that would be suicide if we picked the wrong direction. Actually, either direction could be wrong since the market could sprint in both directions next week while it tries to pick a longer-term direction.

There is no reason to be putting money at risk ahead of the inauguration. By next Wednesday we should have a much better idea what the next 30 days will bring. Please be patient.

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

FDX - FedEx (Short Put)

I recommended last week to not enter the new positions if the market opened lower on Thursday. The market opened lower on Thursday. On Friday the market opened higher and the position was entered at the open with FDX at $187.79. Unfortunately, FDX shares gapped down nearly $3 on Tuesday to stop us out at the open for a minor loss.

Closed Feb $180 short put, entry $1.71, exit $2.35, -.64 loss.

Monthly Cash Machine Play Updates

No Changes

New Option Writer Recommendations

No New Recommendations

Between the Q4 earnings cycle, crummy charts, shrinking option premiums for February and impending event risk, there was nothing available to play that offered a decent risk/reward ratio.

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.

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

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.

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.

Earnings Feb 20th.

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

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.