Thursday, March 02, 2017  12:32:16 AM

That Was Different

by Jim Brown

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Review prior updates here: 2014  2015  2016  2017  2018 
The market posted the biggest gain since the election with the Dow adding more than 300 points.

Last week I wrote about the potential for a trend change over the next couple of weeks but I was not expecting a blowout short squeeze after President Trump's speech to congress. The speech was very well received and everyone that shorted the market expecting a disaster was very disappointed.

The Dow added 303 points, S&P 32 and Nasdaq 78. All those indexes peaked about 2:30 in the afternoon and only faded slightly into the close. The Dow closed over 21,000 for the first time, way over at 21,115. The S&P traded over 2,400 but closed at 2,395.

The bullish sentiment is bulling over from irrational exuberance to euphoria and in the long term that will not be good. The key for this week is holding the gains. If we suddenly have a couple down days that take us back to Tuesday's levels, it would be negative for sentiment but it would actually be positive for the market to see the excesses bleed off and a new rally begin next week.

The Nasdaq posted a remarkable 78 point gain to close over 5,900 after five days of lower highs. The support at 5,800 held and the index was ready for the new leg higher. The leaders were PCLN, GOOG, GOOGL, AVGO, AMZN, BIIB and a couple dozen other companies that posted individual gains over $3 each.

The laggard was the Russell 2000 although it did post the largest percentage gain of the major indexes. It only exceeded its prior high by 3 points. We need the Russell to catch fire and continue making new highs for the market to continue higher. The Dow is 30 stocks and the S&P 500 stocks. The 2000 stock Russell is a broader representation of the market. We are being led higher by gains in only a few big cap stocks and not the broader market.

The short squeeze helped to inflate premiums and there are plenty of potential candidates to choose from tonight. I would not count on the market continuing to roar ahead but I do expect it to maintain its trend even if we have some down days over the next couple of weeks.

When January and February both post gains, the full year gains average 24%. That is the pattern for the 27 out of the 27 times they both posted gains since 1950. It has a 100% success record and I certainly hope we make it 28.

The S&P futures are only down slightly on Wednesday evening but the 2 point drop is minimal compared to what it could be. That is encouraging.

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

IWM - Russell 2000 ETF (Closed Spread)

Previously we were stopped out of the short side on the IWM call spread. The long calls remained open. The sharp drop on the 23rd stopped us out of those calls for a breakeven.

Closed Mar $145 long call, entry .26, exit .27, +.01 gain.
Previously closed Mar $150 short call, entry $1.09, exit $1.61, -.52 loss.
Net loss 51 cents.

STZ - Constellation Brands (Closed Short)

Late last Thursday there was a headline about the resurgence of the border tax and STZ shares fell $9 in 45 minutes only to rebound almost immediately. The border tax would be very negative for their import business.

I considered reloading the short put but we are likely to be stopped out again on the next border tax headline.

Closed Mar $150 short put, entry $1.55, exit $1.85, -.30 loss.
Retain Mar $140 long put, entry .55, currently .05.

NVDA - Nvidia (Closed Short Put)

Nvidia shares were hit with two downgrades to sell on the same day and the stock fell $15 in two days. Fortunately, we were stopped out of the short on the opening gap lower before the put premiums really had time to accelerate higher.

We also got a bad fill on the entry. The put was quoted at $1.50 at the close on Wednesday when I profiled the play. The put opened at 44 cents the next morning. We were cursed from the start on this position.

Closed Mar $95 short put, entry .44, exit .84, -.40 loss.

New Recommendations

SWKS - Skyworks Solutions (Put Spread)

Skyworks closed at a new high as speculation over the iPhone 8 continues to lift all the component suppliers. Skyworks also benefits from phones being manufactured by other companies besides Apple. They are in the sweet spot of mobile technology.

Earnings April 20th.

Sell short Apr $90 put, currently $1.50, stop loss $93.50
Buy long Apr $80 put, currently .30, no stop loss.
Net credit $1.20.

URI - United Rentals (Put Spread)

URI has been a post election favorite and the stock broke out of a month long consolidation to close at a new high on Wednesday.

Earnings April 26th.

Sell short Apr $120 put, currently $2.50, stop loss $125.85
Buy long Apr $105 put, currently .95, no stop loss.
Net credit $1.55.

WDC - Western Digital (Cash Secured Put)

WDC posted good earnings and spiked to more than $80 but then saw a four-week decline. After hitting a low of $73 on the 24th, they announced a new storage 256gb storage chip for the iPhone and iPad and shares took off rising $5 over three days.

Earnings April 26th.

Sell short Apr $70 put, currently $1.01. Stop loss $74.25.

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.

April expiration is the 21st.

New Covered Call Recommendations

NLNK - Newlink Genetics (Covered Call)

NLNK beat the street on earnings and revenue with a strong report. On Wednesday they announced two abstracts on new drugs will be presented on April 4th at the AACR conference in Washington. These will more than likely be positive for the company.

Earnings May 30th.

Buy-write Apr $17 call, currently $16.78-$2.05, stop loss $13.85.
Gain if called $2.17

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.

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.

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.

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.

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

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.

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.

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.