Wednesday, February 22, 2017  10:57:49 PM

Trend Change Ahead?

by Jim Brown

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Review prior updates here: 2014  2015  2016  2017 
I seriously doubt anyone believes the current rally will continue unbroken for the next several weeks.

However, that is what I have been saying for the last two weeks and the market just keeps moving higher. However, there were some indications today that there may be some cracks forming in the foundation.

The Dow performed great with a new set of leaders to offset yesterday's leaders that were the biggest losers today. CVX, XOM and INTC were the laggards and DD, MMM, IBM and NKE were the leaders. Nike was left for dead several weeks ago but it has been resurrected and gained $6 over the last two weeks. I guess I did not get the memo that athletic shoes were suddenly hot again.

The Dow was the strongest index and has now posted gains in nine consecutive sessions. Yes, that streak is starting to tempt fate.

The Dow is closing in on 21,000 and it will have gained more than 3,000 points since November 4th when it reaches that level. That should be the definition of overbought since there was not a single day in those four months that is lost more than 1%.

The S&P has gone 91 days as of today without a 1% drop and 51 days without a 1% move in either direction. It has not done that since 2006 and the time before that was in 1995. We have some amazing factoids in progress and every time they are repeated, it will make investors a little more nervous.


The S&P gained 14 points on Tuesday and only gave back 2 points on Wednesday. I will take that tradeoff every single time. The S&P is not quite as overbought as the Dow and Nasdaq but it is approaching those levels.


The Nasdaq 100 ($NDX) RSI reading rose again to 84.79 when 70 is considered overbought. Wednesday was the highest reading since January 9th, 1992 when it hit 86.39 after a 20% gain in the Nasdaq in only 13 days consecutive days. That move was followed by a six-month decline. Overbought oscillators can always become even more overbought but this is flashing a huge warning sign there could be a peak ahead.


The small caps remain the weakest portion of the market. The Russell 2000 is struggling to break free of 1,400 with little success. The S&P-600 closed back below resistance at 860 after a very minor close over that level on Tuesday.

Until the small cap stocks shake off their weakness and begin making new daily highs like the big cap indexes, the market is going to struggle to move higher. If the small caps joined the party the move could accelerate.



The VIX is still telling us investors are overly complacent. When the VIX is high, it is time to buy. When the VIX is low it is time to go. Unfortunately, the VIX has been low for a long time now without a volatility event. S&P tells us that the average period of low volatility is 55 days. We are well past that and due for an event. The trigger for that event could have been the FOMC minutes today suggesting a rate hike could be sooner rather than later. The market dipped after the minutes today but the move was minimal. It will be interesting to see what happens on Thursday after everyone has had a few hours to ponder that potential rate hike.

Another trigger could be the State of the Union speech next Tuesday. Unless the president pulls something "phenomenal" off the teleprompter, there could be a sell the news event.


I had to reach out to April strikes this week because the continued low volatility has depressed the March options to levels that are not tradable for our purposes. That means there will be seven weeks in this cycle for April and a lot can happen in seven weeks. Be prepared and keep your stop losses in place.

The S&P futures are only down -1 tonight but of course, that could be reversed or doubled by morning. I am encouraged it is not 5 or 6 points.

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


February Position Recap


We did not have very many positions in the February options because this is the period in the quarter where everyone reports earnings and there are few candidates. Secondly the market was flat in January and volatility fell to a multiyear low and there were no premiums. No direction and no premiums make it risky to trade.




Current Position Changes


Cynosure (Closed Short Put)

We got lucky on this position. Last Tuesday the company agreed to be bought by Hologic for $66 per share in cash and the stock was trading at $50 at the time. Our $45 put turned worthless overnight and I recommended we close it at the open last Thursday.

Closed Mar $45 short put, entry $1.80, exit .05, +$1.75 gain.



CYTR - CytRx (Closed)

We wrote a covered call on CYTR several months ago and they reported a failed drug trial that cut the stock from $2.25 to $.55 overnight. We have been holding the stock in hopes they would announce another successful trial and spike the stock to even greater heights. Shares continued to drift lower and the news flow is not promising. I recommended we take our loss and sell the shares.

Closed CYTR shares, adjusted cost $1.90, exit .42, -1.48 loss.



New Recommendations


NFLX - Netflix Inc (Put Spread)

I hate to keep going back to the same stocks but Netflix consistently has some of the highest option premiums and a relatively stable trend. While we cannot predict the future, I think Netflix has more upside than downside in the weeks ahead.

Earnings April 19th.

Sell short April $130 put, currently $2.60, stop loss $138.35
Buy long April $115 put, currently .57, no stop loss.
Net credit $2.03.



DLTR - Dollar Tree (Put Spread)

Dollar Tree is choping around between $75-$80 and the $72.50 put strike has some decent value. DLTR has not touched $72.50 since Nov 2015. I am going to use a wide stop on this that will be pretty close to the strike just to avoid the choppiness.

Earnings May 17th.

Sell short April $72.50 put, currently $1.70, initial stop loss $73.50
Buy long April $60 put, currently 35 cents. No stop loss.
Net credit $1.35.



PII - Polaris Industries (Put Spread)

Polaris has a choppy uptrend with resistance at $90 but it has not touched support at $80 since December. The choppy chart is why the premiums are higher than normal.

Earnings April 25th.

Sell short April $80 put, currently $1.50, stop loss $83.85
Buy long April $70 put, currently .50, no stop loss.
Net credit $1.00.



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.

March expiration is the 17th, April is the 21st.




New Covered Call Recommendations


No New Covered Calls

I was still surprised I could not find any new covered calls other than the ones in the play graphic above. The volatility is just too low. Whenever the market goes directional for a long period the volatility crashes along with the call premiums. Since very few investors expect the market to continue higher, the call premiums are extremely low, even on stocks with strong trends or recent spikes.


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.


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


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.


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

Update 2/8/17: 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.


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


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.


NVDA - Nvidia (Cash secured put)

Nvidia blew away earnings but investors thought guidance was light even though they are the bleeding edge of technology today with new product announcements every week. Shares have pulled back to $109 and they could decline to $100 in a weak market. However, that should be strong support.

Earnings May 9th.

Sell short April $95 put, currently $1.50, stop loss $99.50


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.


STZ - Constellation Brands (Put Spread)

Shares of Constellation have been volatile over the last four months. The stock has been bouncing in the $145-$158 range. However, I think this may be over as talk about a border tax is starting to fade and chances of passage are decreasing. Shares closed at a six-week high on Wednesday after a solid rally from the last low.

Earnings April 5th.

Sell short Mar $150 put, currently $1.65, stop loss $153.00
Buy long Mar 140 put, currently .55, no stop loss.
Net credit $1.10.


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

Update 2/8/17: 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.


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.