Wednesday, April 05, 2017  11:51:22 PM

Beware the Unexpected

by Jim Brown

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Review prior updates here: 2014  2015  2016  2017 
The unexpected events are always the ones that cause the most market damage.

The FOMC minutes are always a potential rough spot but 9 out of 10 times the market has already factored in what they expect to be said. On Wednesday, the market got a double surprise. The Fed talked about unwinding their $4.5 trillion QE portfolio but did not give a time frame or details. It was like a suspicious box thrown into a crowd and nobody knows what it is. Is it a bomb, dirty clothes, rattlesnakes? When no answers appeared, traders decided to head for the exits. It took a few minutes for the implications to sink in that the Fed was talking about dumping trillions of dollars of securities into the market without giving any details. This is not a small event. Even if they just sold $100 billion a month it would take nearly four years to dump all their holdings. Interest rates would definitely rise.

Secondly, the minutes revealed that some members were not happy with the "gradual" pace of rate hikes as specified by Janet Yellen. They would like to move faster and that was another shock to the market. Until today, the market had priced two more rate hikes into the market for 2017. The possibility of 3 or even 4 more was another wake up call.

The Dow had been up as much as 198 points at its highs with the S&P up 20 points. The Dow ended the day with a loss of 40 and the S&P with a loss of 7. This kind of massive reversal almost always damages market sentiment.

The futures are down about -7 as I type this late Wednesday. That could change dramatically by morning in either direction. The futures are just a market weather vane that can change direction for any one of a hundred reasons overnight.

The S&P punched through downtrend resistance at the open and almost hit the 2,380 resistance level from mid March. The retracement put the index back at 2,350 and critical support. If the futures hold overnight, the S&P would open around 2,345. The 2,340 level is the support from the mid March decline.


The Dow crashed back below the resistance at 20,750 and just barely closing over weak support at 20,600. The Dow remains the weakest index. However, the Dow futures are only down -51 points. If there is a rebound on Thursday, it is not likely to be as strong as the ADP fueled short squeeze on Wednesday. Portfolio managers will be watching the tape and trying to decide if they should hold or exit.


The Nasdaq remains the strongest index and the minor 34 point decline still left the index within easy striking distance of another new high. The large cap techs were barely dented. The strength of the decline came from a 2% drop in the biotech sector. That was a major anchor for the tech index.


The small cap indexes were the weakest with the S&P-600 falling back well below critical support at 825. If the index declines just another 7 points, it will be a five month low. Rising interest rates would be bad for small companies.


I would be cautious about launching new long positions ahead of what could be a rocky month. The disorganization in Washington, money leaving the markets to pay taxes and the budget-debt ceiling battle the last week of the month could set the stage for another decline. Offsetting the negatives will be an outstanding earnings cycle with earnings expected to grow nearly 10%.

Be patient with your entries and keep your stop losses tight.

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

Unopened Positions

Covered Calls



Current Position Changes


WDC - Western Digital (Close)

WDC rebounded to a new high at $85 intraday on Wednesday and our short April $70 put is trading at 5 cents. I am recommending we close the position. It took three tries to get a short put to stick on WDC because of the volatility but it was finally worth it.

Close Apr $70 short put, entry $1.00, currently .05, +.95 gain
Previously closed Apr $72.50 short put, entry $1.27, exit $1.80, -.52 loss.
Previously closed Apr $70 short put, entry $1.19, exit $1.17, +.02 gain.



BA - Boeing (Stopped Short Side)

Boeing shares spiked late last week to stop us out on the short April $190 call. The long $200 call is still open but has almost no chance of gaining any value after today's market decline.

Closed Apr $190 short call, entry $1.37, exit .12, +1.25 gain.
Retain Apr $200 long call, entry .28, currently zero.



INCY - Incyte Corp (Stopped Short Side)

Incyte fell -$5 on Friday only to spike $7 on Monday and then trade higher all week. The Friday drop knocked us out of the position. I looked at reselling another put but the option premiums evaporated on the rebound and it would not be worth the risk.

Closed Apr $135 short put, entry $2.17, exit $2.00, +.17 gain.
Retain Apr $115 put, entry .99, currently .05.



TSLA - Tesla Inc (Stopped Short Call Side)

Tesla exploded higher on Monday after they produced more cars than expected in Q1. Shares rocketed from $278 to $305 in two days. We were stopped out of the short call and I am recommending we close the long call before Tesla falls back to earth.

Closed Apr $295 short call, entry $3.02, exit $5.08, -2.06 loss.
Closed Apr $310 long call, entry $1.14, currently $2.45, +1.31 gain.

TSLA - Tesla Inc (Close Short Call Put)

We also have a put spread on Tesla and the short April $230 put is worthless. I am recommending we close that position.

Close Apr $230 short put, entry $2.00, currently .07, +$1.93 gain.
Expiring Apr $215 put, entry .68, currently zero, -.68 loss.



NLNK - Newlink Genetics (Stopped Covered Call)

It is very rare that we can be stopped out of a covered call for a nice gain but it happened with NLNK. We entered the position back on March 2nd at $16.80 and sold the $17 call. The stock gained $8 over the last four weeks. When it crashed on Tuesday it opened one cent above our stop loss at $19.25 and the short call overreacted dropped to $1.50 giving us a gain on both the stock and the call.

Closed NLNK shares, entry $16.80, exit $19.25, +2.45 gain.
Closed Apr $17 call, entry $3.30, exit $1.50, +1.80 gain.



New Recommendations


DPZ - Domino's Pizza (Call Spread)

Domino's has topped out at $190 and has been trading sideways between $182-$190 for two months. With the potential for a market decline in April, I am going with a call spread because I believe it will be hard for DPZ to punch through resistance in a weak market. There are a lot of gains from January that have not yet been captured and that could produce weakness if the market starts to wobble.

Earnings May 30th.

Sell short May $200 call, currently $1.60, stop loss $191
Buy long May $220 call, currently .40, no stop loss.
Net credit $1.20.



ACIA - Acacia Communications (Short Put)

ACIA appears to have bottomed at $50 and has been trending slowly higher until today. The trend has been solid despite some volatility in the market. Today was the exception but it did try to rally in the afternoon.

Earnings May 25th.

Sell short May $45 put, currently $1.35, stop loss $49.50.



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.

May expiration is the 20th.




New Covered Call Recommendations


No Covered Calls

The combination of the market reversal today and the impending earnings cycle eliminated all of the potential covered call candidates without taking on too much risk. I would not have any problem with the SLCA call in the graphic above, but we already have one in the portfolio and I did not want to add another.


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.


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

Update 3/22/17: The Tuesday market crash also knocked us out of the Acordia covered call for a breakeven.

Closed ACOR shares, entry $28.30, exit $25.85, -$2.45 loss.
Closed Apr $28 call, entry $5.04, exit $2.70, +2.34 gain.
Net loss 11 cents.


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

Update 3/22/17: AMD closed on Friday at $13.49 and we had sold a $14 call. That call expired worthless and we need to resell an April call. Shares ar moving slowly higher and you have the option of selling the April $14 call for 97 cents with AMD at $14.10 or selling the $15 call for 58 cents and hoping to get an additional 90 cents of stock appreciation over the next three weeks. I am recommending the $14 call because the higher premium provides a little more insurance against a dip. Support is $13.

Expired Mar $14 call, entry .90, expired, +.90 gain.

Sell short Apr $14 call, currently .97, stop loss $12.85.


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


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.


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.


ITCI - Intra Cellular Therapies (Covered Call)

Shares were very volatile with earnings on March 1st but have shaken off that volatility and are moving nicely higher. I picked ITCI because of the nice trend. The call is well out of the money but the trend id likely to continue and we can pocket some gains from the rise in the stock price.

Earnings June 1st.

Buy write ITCI April $17.50 call, currently $15.42 and $1, stop loss $13.85.
Gain if called $3.08.

Update 3/22/17: The Tuesday market crash also knocked us out of the ITCI covered call.

Closed ITCI shares, entry $15.40, exit $13.85, -1.55 loss.
Closed Apr $17.50 call, entry $1.00, exit .80, +.20 gain.
Net loss $1.35.


JACK - Jack in the Box (Put Spread)

JACK is recovering from a post earnings beating and should return to the $110 level before the May earnings. Analysts have started to talk positive about JACK as a survivor in the current restaurant recession.

Earnings May 17th.

Sell short May $95 put, currently $2.00, stop loss $98.15
Buy long May $85 put, currently $.50, no stop loss.
Net credit $1.50


NFLX - Netflix Inc (Put Spread 3/08)

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.


NFLX - Netflix (Put Spread 3/15)

I hate to keep going back to Netflix for a play nearly every week but they have a trend and great option premiums. The only negative about Netflix is that the premiums do not decline until the last couple weeks of the cycle. They do not decay much until they get close to expiration. This strike is well out of the money and hopefully we will not get stopped. One reason the premium does not decline is that earnings are 3 days before expiration. We will need to exit this position early.

Earnings April 18th.

Sell short April $135 put, currently $2.45, stop loss $139.75
Buy long April $120 put, currently .55, no stop loss.
Net credit $1.90.


NFLX - Netflix (Put Spread 3/22)

I am going to have to start calling this the weekly Netflix spread. They simply have the best premiums well out of the money and I am going to continue to take advantage of it.

Earnings April 19th.

sell short Apr $130 put, currently $2.18, stop loss $136.45
Buy long Apr $120 put, currently .83, no stop loss.
Net credit $1.35.


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


PANW - Palo Alto Networks (Put Spread)

Palo Alto posted better than expected earnings but revenue of $422 million missed estimates for $430 million on "execution issues." That was not explained and the stock was crushed. Shares found support at $115 and have been moving sideways for over two weeks. It is time for the shares to begin ticking higher. After this long, it is doubtful that they will move significantly lower. They have had plenty of time and $115 was solid support.

Earnings May 30th.

Sell short April $110 put, currently $1.50, stop loss $113.85.
Buy long April $100 put, currently .45, no stop loss.
Net credit $1.05.

Update 3/22/17: Palo Alto was another casualty of the Tuesday market crash. The stock broke month long support to stop us out at $113.85. The long put is still open and actually has a good chance of increasing in value.

Closed Apr $110 short put, entry $1.30, exit $2.00, -.70 loss.
Retain Apr $100 long put, entry .26, currently .25, no stop loss.


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.

Update 3/8/17: 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.

Update 3/22/17: Polaris plunged $5 in Tuesday's market crash and stopped us out on the remaining short put. We still have a long April $70 put but it is well out of the money. I debated on closing it today for the 25 cent premium or letting it ride for another week. If PII breaks support at that $83 level, it could retest $80 and we could close the put next week. However, that is another week of premium deflation unless PII was todecline sharply. Because the stock did not rebound today, I elected to retain it.

Closed Apr $75 short put, entry .85, exit .45, +.40 gain.
Retain Apr $70 long put, entry .60, currently .25. No stop loss.


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.


SLCA - U.S. Silica Holdings (May Covered Call)

SLCA has found a bottom along with oil prices. Now that refineries are restarting and producing summer fuel blends, oil inventories will decline and prices should rise. This will continue to lift the energy sector. SLCA produces sand for fracking oil wells. Sand prices have doubled over the last 12 months and are expected to go up another 25% by fall. Some analysts are predicting a sand shortage late this year and early 2018. That will lift prices even higher.

Earnings May 24th.

SLCA has solid support at $43 when oil was crashing throughout March. If we are not called we will sell a new call.

Buy write SLCA May $50 call, currently $47.84-$2.25, no stop loss.
Net gain if called $4.41.


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.

Update 3/8/17:

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.

Update 3/22/17: Skyworks was another casualty of the Tuesday market crash and our short put was stopped out. We have a long April $80 put but unless lightning strikes it will expire worthless.

I considered reshorting the Apr $90 put but the bid/ask spread is 40 cents .60/.100. If we were stopped again it would be a loss for sure. That is available if a reader wants to take the chance in this market with SWKS at $97.

Closed Apr $90 short put, entry $1.20, exit .90, +.30 gain.
Retain Apr $80 long put, entry .32, currently zero.


TSLA - Tesla Inc (Put Spread) 3/22

Shares of Tesla rallied last week on the Autocar article on the Model Y and then faded somewhat in the market crash on Tuesday. Since the company is doing a secondary for far less than investors expected, the stock is not likely to decline below support.

Sell short Apr $230 put, currently $2.00, stop loss $239.50
Buy long Apr $215, currently .77, no stop loss.
Net credit $1.23.


TSLA - Tesla Inc (Call Spread) 3/29

We have an April put spread on Tesla. With the potential for a market hiccup over the next four weeks I am adding a call spread to capitalize from any decline.

Earnings May 17th.

Sell short April $295 call, currently $2.94, stop loss $287.50
Buy long April $310 call, currently $1.13, no stop loss.
Net credit $1.81.


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.

Update 3/8/17: 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)

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.

Update 3/8/17: 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.


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.

Update 3/22/17: Western Digital was another casualty of the Tuesday market crash. We were stopped at $74.25 on the short $72.50 put. This was the second strike on selling a short put on WDC. Call me crazy but I am going to try it again. The intraday dip at the open this morning hit $71.38 and then rebounded to $75. That should have cleared any sell stops today. It also inflated the premiums to give us another chance.

Closed Apr $72.50 short put, entry $1.27, exit $1.80, -.53 loss.

Sell short Apr $70 put, currently $1.01, stop loss $72.85.


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.