Last Wednesday the market was soaring to record highs after the president's speech, this Wednesday they have erased all those gains.
The major indexes with the exception of the Nasdaq closed at or near their lows for the day. The Dow imploded in the last few minutes of trading to decline -86 points before rebounding slightly at the close to lose -69 points. The S&P gave back 5 points and closed only 2 points above what should be solid support at 5,360.
The S&P-600 and Russell 2000 small cap indexes both closed at the lows for the day and with big losses. The S&P-600 has declined for five consecutive days and broke below key support at 846. The next test should be 825 and it should be decent support. However, a break below that 825 level could be very bad for the broader market.
The Russell 2000 has a similar chart with a support break of the 1385-1388 level. Support is now 1,340 and a break there has a lot of clear air on the chart before hitting bottom.
I do not expect the small cap indexes to break those support levels on the first attempt but there are some headlines ahead that could tank the entire market. Small caps are currently leading the market lower and these headlines could be poison.
The Nasdaq is best looking chart. Wednesday was an "inside day" with the highs and lows inside the range from the prior day. The Nasdaq looks like it has stopped declining from the last Wednesday high but you never know if today was just a pause.
Support at 5,800 should be strong. If that breaks we are in for some serious trouble.
The events to worry about are the Fed meeting on Wednesday and the debt ceiling expiration. Add to that the growing likelihood the tax cut proposal will be pushed out into 2018 and we have some headlines that could tank the market. Goldman said if the tax proposal was pushed into 2018, we could expect a 10% to 15% decline in the market. All the recent gains were made on expectations for lower taxes and lower regulation.
The rest of this week could be choppy but the two days before the Fed announcement are normally positive even when rate hikes are expected. It is what happens after next Wednesday that could send the market lower.
Send Jim an email
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 Position Changes
GS - Goldman Sachs (Put Spread)
Goldman Sachs dipped below our stop loss on the short side at $250.85 on Monday to stop us out. We recovered the lost premium from the first stop but we are going to lose money on the long put unless the market crashes. I looked at selling another short put but this is the March cycle with only 7 days left. The only put we would sell with premium left would be the $240 strike. With the Dow closing at the lows today after being down for several days, I decided it was not worth the risk to try and recover another 50 cents. Goldman could drop $10 in a heartbeat if the market decides to roll over. Active traders could sell that put and then monitor Goldman closely and bail if the market turns negative. If I tried to construct this setup in the newsletter I would have to put the stop loss so close to the current stock price that any dip would close the position before the short put premium inflated.
Closed Mar $220 short put, entry $1.39, exit .10, +1.29 gain.
Previously closed Mar $220 short put, enrty $2.46, exit $3.70, -1.24 loss.
Retain Mar $200 long put, entry .50, target 50 cents for an exit on any sudden drop.
NFLX - Netflix (Closed Short Side)
Netflix dropped sharply on March 2nd to stop us out at $141.35. There was no news but the Nasdaq gave back half of the 90 point gain on March 1st.
We had two positions on NFLX. The March position cannot be resold. The stock has been in a downtrend for three days and any option not near the money has no value.
The April position is still far enough from expiration we can reload it with a different strike price.
Closed Mar $135 short put, entry $1.42, exit .56, +.86 gain.
Retail Mar $125 long put, entry .44, currently zero.
Closed Apr $130 short put, entry $2.68, exit $2.54, +.14 gain.
RELOAD: Sell short Apr $125 put, currently $1.48, stop loss $135.
Retain Apr $115 long put, entry .55, currently .44.
PII - Polaris Industries (Closed Short Put)
Polaris crashed with the market at the open on Monday to stop us out at $84.65 on the short side of our spread. I am recommending we reload it with a lower put. The $80 put is too close to the stock price and the market is weakening. It may only be temporary but we should be cautious.
Closed Apr $80 short put, entry $1.65, exit $2.50, -.85 loss.
RELOAD: Sell short Apr $75 put, currently 70 cents, stop loss $83.50
Retain Apr $70 long put, entry .65, currently .35.
SWKS - Skyworks Solutions (Closed Short Put)
We were stopped out of the short side with SWKS crashed with the Nasdaq on Monday at the open. I am recommending we reload with the same strike. The stock is moving up again and closed near its highs.
Closed Apr $90 short put, entry $1.82, exit $1.85, -.03 loss.
RELOAD: Sell short Apr $90 short put, currently $1.10, stop loss $93.50
Retain Apr $80 long put, entry .32, currently .15.
URI - United Rentals (Closed Short Put)
Somebody wanted out of URI in a hurry. After gapping up more than $1 to $130 at the open today the stock rolled over and fell to a 2-week low at $124. We were stopped out at $125.85. There was absolutely no news and that makes me nervous about trying to reload the position.
This could be a sign the broader market is about to decline. Several stocks that had been winners suddenly headed south on Wednesday. We will keep the long put and see if the direction stabilizes by next week.
Closed Apr $120 short put, entry $2.97, exit $4.10, -1.13 loss.
Retain Apr $105 long put, entry .74, currently $1.00.
VIX - Volatility Index (Call Spread)
We have a speculative call spread on the VIX to be executed on a spike to $18. Since I added that potential position several weeks have passed and the April strikes were sneaking up on us. I modified the recommendation to use the May strikes if/when the VIX spikes to $18.
With a VIX trade at $18
Sell short May $20 call, estimated $3.00, no stop loss.
Buy long May $30 call, estimated 50 cents, no stop loss.
BA - Boeing (Call Spread)
Boeing has been a star performer since October. They are up over $50 in that period with a $20 spike since the beginning of February. They appear to be topping out and the Dow is weakening. With the Fed meeting, debt ceiling and the tax cut proposal moving farther into the future every day, the Dow is likely to continue to weaken. Those stocks that led the charge higher are going to give back some of those gains.
Earnings April 26th.
Sell short April $190 call, currently $1.41, stop loss $185.85
Buy long April $200 call, currently .27, no stop loss.
Net credit $1.14
INCY - Incyte Corp (Put Spread)
Incyte has a great pattern of gaps higher after earnings and no material retracements after the last two events. Shares spiked from $120 to $130 after earnings in late February and are close to a new high on Wednesday. There are no signs of sellers in this stock.
Earnings May 16th.
Sell short April $125 put, currently $2.40, stop loss $131.50
Buy long April $115 put, currently .90, no stop loss.
Net credit $1.50.
PXD - Pioneer Natural Resources (Call Spread)
Crude oil fell 5% on Wednesday to $50 and the lowest level in 2017. Energy stocks were crushed with PXD losing nearly $10. For various reasons oil is not likely to rebound strongly and energy equities are even less likely to rebound suddenly.
Earnings May 9th.
Sell short April $200 call, currently $1.95, stop loss $192.50
Buy long April 215 call, currently 65 cents, no stop loss.
Net credit $1.30.
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
ACOR - Acordia Therapeutics (Covered Call)
Acordia is surging higher despite the volatility in the biotech sector. The stock closed at at 10-month high on Wednesday in a weak market. Volatility in the options suggest there may be something going on behind the scenes. They could be ripe for an acquisition.
Earnings May 16th.
Buy write ACOR April $28 call, currently $4.10, stop loss $24.35
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.
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
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.
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.
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.
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.
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.