Thursday, February 09, 2017  12:25:16 AM

Stealth Rally

by Jim Brown

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Review prior updates here: 2014  2015  2016  2017  2018 
After weeks of seeing the indexes move sideways there is actually a minor upside bias.

The market is still heavy and struggling for every point but the volume of sellers has faded. At the same time the dip buyers remain alive and well and are buying at ever higher levels. There is a low conviction battle in progress but the buyers have a slight edge.

We have had numerous opportunities for a decent correction over the last several weeks. They start out with a big futures dip and gap down open but the dips are bought and the indexes moved higher.

The Russell 2000 is the exception. It has closed lower for the last three days and the small cap charts look like they have been lining the bottom of a bird cage.

The Dow cannot seem to put 2-3 days of gain together and now that earnings are over for that index it is going to be harder to generate any enthusiasm.

The Nasdaq remains the leader with another new high today but eventually the big cap techs are going to have to rest. The Dow and S&P will have to pick up the slack when that happens or we really will get that correction.

The S&P is stuck below strong resistance at 2,300, which has become the new Dow 20,000. That is the key market level to watch. A "convincing" break over 2,300 could stimulate a lot of short covering and some price chasing from those managers currently waiting for a bigger dip to buy.

The key point to everything above is that the dip buyers are supporting the market. They are not able to push the Dow/S&P higher but the pattern of higher lows suggests they will eventually succeed.

However, expiration week in February and the week after is prone to weakness from post earnings depression. The cycle is fading and the headlines are fewer. Tax time is coming and investors are taking profits from the winners and trying to decide what to do next.

Fortunately, for us, the passing of the earnings cycle gives us a lot more potential play candidates. Unfortunately, the low VIX and the sideways market action for the last two months have collapsed the premiums to a point where the profits are minimal. We need a direction to appear, preferably to the upside, to reinflate the premiums.

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

GS - Goldman Sachs (Stopped/Reload)

Goldman gapped down last Thursday to stop us out of the short put. I am recommending we reopen the same strike.

Closed Mar $220 short put, entry $2.46, exit $3.70, -1.24 loss.

Sell short Mar $220 put, currently $1.50, stop loss $229.25

Retain Mar $200 long put, entry .50, currently .30.

VIX - Volatility Index (Change Strike)

The market refuses to decline and the VIX refuses to rise. Both of those facts will eventually reverse. I profiled a March call spread in the VIX in the prior newsletter. With time expiring quickly, I am revising that to use April strikes.

With a VIX trade at $18

Sell short Apr $20 call, estimated premium $3.00, no stop loss.
Buy long Apr $30 call, estimated premium 50 cents, no stop loss.

New Recommendations

NFLX - Netflix (Put Spread)

Netflix has broken out to a new high at $145 and showing no signs of weakness. There is solid support at $140 and I think we can squeeze in a 135/125 put spread.

Earnings April 19th

Sell short Mar $135 put, currently $1.47, stop loss $138.85
Buy long Mar $125 put, currently .40, no stop loss
Net credit $1.07.

CYNO - Cynosure (Cash secured put)

CYNO beat on earnings on Tuesday on record revenue that rose 19%. Shares are moving higher after the report. With support at $49 I am recommending a $45 short put.

Earnings May 9th.

Sell short Mar $45 put, currently $1.70, stop loss $48.85.

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

AMD - Advanced Micro Devices

AMD was left for dead multiple times over the last several years. They have reinvented themselves and are becoming an actual competitor for Intel and Nvidia. They beat on earnings and have several new products in the delivery stream.

Earnings May 2nd.

Buy-write Mar $14 call, currently $13.56 and $.80, stop loss $11.85
Gain if called $1.24

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

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.

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.

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

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.