Wednesday, February 01, 2017  11:26:30 PM

Becoming Routine

by Jim Brown

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Review prior updates here: 2014  2015  2016  2017  2018 
The overnight drop in the S&P futures is becoming so routine the VIX barely reacts.

The futures tank overnight and the major indexes crash at the open. The VIX rises a point or two and then all the volatility evaporates when the dip buyers appear. The economics are good, earnings are ok, sentiment is bullish BUT we keep getting these unresolved declines with no follow through. The dip buyers are eventually going to realize that pulling their bids for a couple days might actually give them a better entry point.

The S&P futures are down -8.75 as I type this. I have no idea what caused it and I do not have time to research it. This may just be a sell the news event now that the majority of the major earnings are behind us. However, I would have thought they would wait until at least Friday after Amazon reports on Thursday evening.

There could be any number of reasons but there are a couple headlines tonight that could be causing some concern. Trump apparently told the president of Mexico to clean up his mess at the border or the U.S. would send in troops to do it for him. That is not exactly an exercise in political correctness when dealing with the leader of another country. Secondly, news broke that Trump apparently hung up on the prime minister of Australia on Saturday saying this was "the worst call of the weekend."

I think we are about to find out how resilient this market is in reaction to presidential arrogance. It may not be pretty.

The S&P is still loitering within range of strong resistance at 2,300 but the opening spike on Wednesday was immediately sold. There is light support at 2,268 and 2,260 with stronger support at 2,250. If we were to get one of those 1% down days we could hit that 2,250 very easily.

The Dow is only about 210 points from a new high and easily reachable under the right circumstances. However, we are running out of catalysts. Most of the Dow components have already reported and we are now in the post earnings depression phase where those prior reporters give back some gains as traders move on to other stocks still to report.

If we were to break below the blue line again at 19,725 I seriously doubt there would be a big rebound. The path of least resistance from there is significantly lower.

The Russell 2000 has been the weakest index and a break below 1,340 would most likely hit 1,310. Hopefully that would satisfy traders in their quest for a better entry point and we could rally from there. If 1,310 breaks, we are in a lot of trouble.

I am going to be very cautious over the next couple weeks in recommending positions. Readers can pick extras out of the additional play graphic but there is not a lot to choose from because of the earnings and low premiums. There were a few extra choices today because we are at the midpoint in the earnings cycle but the majority of the post earnings charts were terrible with either big declines or big spikes.

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

Current Position Changes

No Changes

New Recommendations

IWM - Russell ETF (Call Spread)

The Russell 2000 has been the weakest index and it is threatening to break below support at 1,350. I have looked at hundreds of small cap charts and the vast majority are very bearish. The index is only being kept alive by a small number of stocks, mostly in the biotech sector.

The S&P futures are down -8.50 as I type this so the odds are good we are headed for some real profit taking. I am recommending a call spread since we may not be back in this area with a bullish bias for several weeks.

Sell short Mar $140 call, currently $1.08, stop loss $137.65
Buy long Mar $145 call, currently .27, no stop loss.
Net credit 81 cents.

VIX - Volatility Index (Call Spread)

The VIX has been slightly elevated over the last several days to close near 12 today. If we were to get a major downdraft, I would like to capture that by selling a call spread. We are going to enter the spread with a VIX trade at $18. There will be no stop loss because it rarely stays high for more than a couple days.

With a VIX trade at $18,

Sell short Mar $20 call, estimated premium $2.00, no stop loss.
Buy long Mar $30 call, estimated premium 40 cents, no stop loss.
Estimated net credit $1.80

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, March is the 17th.

New Covered Call Recommendations

No Covered Calls

Existing 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.

CYTR - CytRx Corp (Covered Call)

It was going to be very hard to lose money on this position.

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.

GS - Goldman Sachs (Put Spread)

Goldman was the market leader in November with an unbelievable surge. Shares were flat for five weeks in Dec/Jan before crashing back -$16 over a three day period. A bottom formed at $230 and shares are moving higher again. There is strong resistance at $246 but as long as the market continues to make new highs, Goldman should be making new highs as well.

Earnings Apr 19th.

Sell short Mar $220 put, currently $1.94, stop loss $229
Buy long Mar $200 put, currently .48, no stop loss.
Net credit $1.46

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

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

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.

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.

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.