Thursday, May 04, 2017  12:25:44 AM

Risk Fading

by Jim Brown

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Review prior updates here: 2014  2015  2016  2017  2018 
The event risk for the coming weekend is slowly fading.

The House passed the budget bill and the Senate is expected to do the same to get it on President Trump's desk before the deadline on Friday. The polls for the French election have stalled at 60/40 with Macron well in the lead over Le Pen. The Fed is in the rear view mirror and the Nonfarm Payroll report is going to be ignored. There are rumors the Trump Care bill will be put to a vote on Thursday and is expected to pass the House. The markets rebounded from their lows when the rumors first broke and the futures are up +3 overnight.

All the big cap tech stocks that matter have already reported and while some of the results were disappointing, the market is holding up well. It would appear that the majority of the market roadblocks have evaporated. That scares me a little because the market likes to climb a wall of worry and without worries the can be a lack of catalysts as well.

I would be thrilled if the market picked a direction and stuck with it for several weeks and it would be great if that direction was positive. However, and you knew there would be a however, the Dow and S&P are still fighting overhead resistance. One strong day would solve that problem and we could see those indexes follow the Nasdaq higher.

The Dow remains stuck under 21,000 and the prior high was 21,115 so there is a secondary resistance at that level as well. The Dow has been trending lower since early last week but in very small increments. Actual support is well below at 20,600.

The S&P is still fighting resistance at 2,388 and has closed at or near that level on 6 of the last 7 days. On Tuesday, it closed at 2,391 but immediately fell back on Wednesday. The prior high close was 2,395 and there is round number resistance at 2,400.

The Nasdaq ran into long-term uptrend resistance at 6,100 and then fell back on Apple's earnings. Facebook reported after the bell today and shares declined sharply. That is the last major tech stock that could be a market mover.

The Russell 2000 broke out to a new high last week but could not hold it. The index has declined on 3 of the last 4 days and is holding just over prior resistance at 1,388 that needs to hold or we could be in trouble. The next target would be 1,340.

While the markets are holding the majority of their recent gains, the market breadth is narrowing. This could be temporary as a result of post earnings depression given the large number of stocks that reported over the last two weeks.

I would continue to be cautious until the Dow is over 21,115 and the S&P over 2,400. We are at a critical point on the calendar for earnings and at the same time the start of the Sell in May cycle, if there is going to be one this year.

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

AMD - Advanced Micro (Add a put)

AMD shares imploded after earnings and declined -$3.50. There was a minor rebound today but not enough to reflate call premiums. We have sold 3 calls on AMD over the last two months. I am recommending today that we close the current $13 call and buy a May $10 put to protect us from further declines. I believe AMD will turn around because of their new Ryzen 7 server processor. We just need to wait until the stock rebounds slightly to sell another call. We have received $2.70 in call premiums to date compared to the $3.39 decline in the stock price so we are still in good shape.

Close May $13 short call, entry .97, currently .04, +.93 gain.
Buy May $10 put, currently 35 cents, no stop loss.

JACK - Jack in the Box (Replacing short side)

We were stopped out on the short side of this put spread on the 13th. Now that JACK has gone directional again, I want to replace that short put. We have a long put that is worthless so we should use it.

Sell short May $95 put, currently 60 cents, stop loss $100.75
Retain May $85 long put, entry .54, currently zero.

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

Silica shares have collapsed. The stock has declined $11 in the last two weeks despite strong earnings and stronger guidance. Making the situation worse was a big earnings miss by Emerge Energy Services (EMES) reporting a loss of 38 cents compared to estimates for 34 cents. EMES misses estimates 58% of the time so a miss is not uncommon. However, it does impact the other two stocks in the sector, SLCA and HCLP. Emerge said total sand volumes rose 185% to 1,251,000 tons. We know from other reports that sand prices have doubled over the last six months and are expected to double again over the next six months.

Also, Dan Loeb's hedge fund Third Point is shorting the frac sand distributors. Third Point said there could be a shift from northern white sand to abundant in-basin brown sand. They warned there were new sand reserves being developed and there were significant reserves on the sidelines that had been deactivated during the slump. SLCA debunked all those excuses in their earnings report. They said frac sand revenue rose 161% YoY and 41% from Q4.

Comments from the conference call: Our comments last quarter and other industry capacity expansion announcements have created questions for some investors over the potential future supply and demand balance of sand proppants and the implications for pricing and other industry dynamics. Let me take a few minutes this morning to share some thoughts on how we see this unfolding and why we believe that the sand proppant market fundamentals should say strong for the foreseeable future.

We believe our industry will remain tight in the near future due to 3 main factors: First, our industry must add capacity to meet customers' needs. Our internal estimates and current sell side reports estimate industry sand proppant demand to be about 75 million tons here in 2017, growing to over 100 million tons in 2018, with some estimates as high as 147 million tons.

Our industry will be short capacity and we cannot let sand become the bottleneck for the completions industry. Second, oil sand is not fungible within that 100-million-plus tons of projected 2018 demand. Unlike many industrial products, there is a lot of friction in the sand market for a variety of reasons, including logistics, quality differences and mesh sizes. Therefore, we're on average to see 20% to 25% more total supply than demand before our markets come into balance. So for example, if 2018 demand is 110 million tons, that implies that supply and demand balance around 135 million tons of effective capacity. Today, even after estimated reactivations of idle capacity, our industry will only have approximately 90 million tons of effective capacity, thus leaving a 45-million-ton shortfall versus projected 2018 needs. And third, even all the likely capacity additions that are being talked about are not enough. We think there could be an additional 10 million to 15 million tons of brownfield capacity added in the next 12 to 18 months, including our own expansions and perhaps as much as 20 million to 25 million tons of greenfield capacity being added locally in the Permian. All of which will be needed, if current demand estimates prove accurate. Even if our estimated 35 million tons of potential brownfield and greenfield additions come online, the market will still be short.

Full transcript HERE

I cannot fix the current covered call. I am recommending we close it but call premiums are depressed and I am not going to recommend selling a new $40 call today because that would lock in our loss on the first rebound. We need to wait for the rebound to inflate premiums then sell a new call in the $45 range.

We cannot buy a put to protect against further declines. The put premiums are too expensive. You could close the position, take the loss now and then buy back in when the stock rebounds.

Close May $50 short call, entry $2.40, currently .04, +$2.36 gain.
Retain SLCA shares.

SLCA - U.S. Silica Holdings (Short Put Update)

If you read the prior commentary, you know the facts on SLCA. We have a June $45 short put that is under water. We sold it for $4.50 last week. I am recommending we turn this into a spread to protect against a further decline. This will reduce our eventual gain but it will ease the pain now.

Buy June $37 put, currently $2.55, no stop loss.
Retain June $45 short put, entry $4.50, currently $8.00.

New Recommendations

ILMN - Illumina (Put Spread)

Illumina reported earnings and revenue that roughly matched analyst estimates but the guidance was strong and the story was better. They recently spun off a company called GRAIL and profited from the sale of partial ownership. They launched a new product called VeriSeq for non-invasive prenatal testing in Europe. More than 135 NovaSeq systems were ordered in Q1 and they cost up to $1 million each. They guided for 10% to 12% revenue growth in 2017 and GAAP earnings of $5.26-$5.36. Shares have been moving up steadily since the April 25th earnings.

Earnings July 25th.

Sell short June $175 put, currently $2.20, stop loss $180.85
Buy long June $160 put, currently .80, no stop loss.
Net credit $1.40.

TSLA - Tesla Inc (June Call Spread)

Tesla shares may have finally found a top. The earnings loss was significantly more than expected and shares declined to close at the low for the day. The $1.33 per share loss made people rethink what they were thinking with a $330 stock price.

Earnings Aug 3rd.

Sell short June $350 call, currently $3.75, stop loss $327.50
Buy long June $370 call, currently $2.00, no stop loss
Net credit $1.75.

New Covered Call Recommendations

No New Calls (Covered Call)

I did find a lot of candidates and there are five good ones in the list below.

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.

June expiration is the 16th.

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

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.

Update 4/12/17: AMD took a beating from Goldman with a sell rating and $11 price target. Shares have declined to $12.75 and our short call is worthless. I am recommending we close the April call and sell a May call.

Close Apr $14 short call, entry .95, currently .08, +.87 gain.

Sell short May $13 call, currently $1.06, no stop loss.

Previously closed: Mar $14 call, entry .90, expired +.90 gain.

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.

Update 4/26/17: Dominos crashed in early April and we had a bear call spread. Last week I lowered the stop loss on the short call just in case Dominos recovered. The stock gapped up with the market at the open on Monday and knocked us out of that short call for a decent gain. Unless somebody decides to buy Dominos, which is highly unlikely, our long call will expire worthless. It is $40 out of the money.

Closed May $200 short call, entry $1.87, exit .65, +1.22 gain.
Retain May $220 long call, entry .15, currently zero.

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

Update 4/17/17: JACK shares fell $6 in four days to stop us out of the short side of this put spread at $99.75. There was zero news to account for the move.

Closed May $95 short put, entry $1.90, exit $2.30, -.40 loss.
Retain May $85 long put, entry .54, currently .35. no stop loss.

MU - Micron Technology (Covered Call)

Micron reported better than expected earnings and raised guidance. Shares spiked then rolled over in the semiconductor meltdown last week. They are starting to rise again. The company said memory prices were up an average of 20% last quarter and they expected prices to continue to rise due to a shortage in the market.

Earnings June 22nd.

Buy-write May $27 call, currently $27.25-$1.25, stop loss $25.25
Gain if called $1.00.

NFLX - Netflix (June Put Spread)

Netflix reported earnings last week and shares crashed back to $138 intraday on what some called weak guidance. They immediately rebound as analysts began to pound the table on the stock. Several days after earnings the CEO tweeted they had exceeded 100 million subscribers. They guided to add 3.2 million in Q2 and analysts now believe that was a lowball number. Multiple analysts have raised price targets to the $175 level.

Earnings July 17th.

Sell short June $140 put, currently $1.73, stop loss $143.00
Buy long June $130 put, currently .57, no stop loss.
Net credit $1.16.

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.

Update 4/17/17: SLCA shares imploded over the last week along with the price of oil. On Wednesday alone, crude prices fell -$1.83 to knock -$2.34 off the price of SLCA. I am not the least bit worried about SLCA long term. Sand prices have doubled over the last six months and they could double again over the next year. The decline in SLCA shares was directly related to the fall in oil prices and that trend is about over. Refiners are back at work and crude inventories are going to start declining rapidly as they gear up for summer blend fuels. I would not have any problem selling a call or put at this level at this point on the calendar.

We do not have a stop loss on the SLCA covered call because of the calendar bias for oil prices to rise starting in late April through July.

No change in the position.

SLCA - U.S. Silica Holdings (Short June Put)

We already have this as a covered call that is significantly underwater. However, they reported strong earnings this week and guided for 20% earnings and revenue growth for the foreseeable future. The stock is going to move higher as soon as oil finds a bottom, which is always does in late April, early May because of the demand cycle.

Strong guidance on earnings call. Earnings gudiance

I am recommending a slightly in the money put at $45 but the premium is $3.80. It is $1.94 in the money so the market maker cannot just put you the stock or he loses $1.86. If you were put, just repeat the process and you make $1.86 every time. Trust me, they will not put it to you. You have to be prepared in case they do but 99 times out of 100, they will not do it.

Earnings July 24th.

Sell short June $45 put, currently $3.80, no stop loss.

TMUS - T Mobile US Inc (Short Put)

T Mobile has a nice chart with a close at a 52-week high on Wednesday. The 50-day average has been support for months and we can set our stop loss just under that level. TMUS just spent $8 billion in a FCC spectrum auction this week in order to expand its coverage. They quadrupled their holdings of low-band spectrum and now have more per customer than any other mobile provider.

Earnings May 16th. (before expiration)

Sell short May $60 put, currently $1.00, stop loss $63.25

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.

Update 4/12/17: We have a pending call spread on the VIX with a spike to 18. The VIX closed right at 16 on Wednesday and could hit 18 over the next couple of sessions. We have had this recommendation in place for several weeks and the May strikes are now too close on the calendar. I am changing the recommendation to use June strikes.

With a VIX trade at $18
Sell short June $20 call, estimated $3.00, no stop loss.
Buy long June $30 call, estimated 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.