Thursday, August 03, 2017  12:49:50 AM

Time Growing Short

by Jim Brown

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Review prior updates here: 2014  2015  2016  2017  2018 
The typical August/September weakness normally begins next week.

August has only posted gains 5 times in the last 20 years. Despite that record, there is no guarantee August will be a negative month but the recent market divergence is definitely setting the stage for some potential volatility.

The Nasdaq fell -143 points last Thursday and it made a lower low today despite the gains from Apple. The 6,335 level is critical and a close below there could trigger some additional selling with a target of 6,100. There was an afternoon rebound so the dip buyers are still active but they are weak. The market breadth has been declining. The end of month retirement contributions should now be over and Thursday could be critical for market direction. However, we still have a strong slate of earnings this week and next week is when the decline normally begins.

The S&P has not made a new closing high since July 26th but the index has not moved away from that level. It remains just under new high resistance and could break out at any time but that is unlikely. The S&P is the second strongest index behind the Dow but there is a world of difference between hugging the flat line for two weeks while the Dow is adding 500 points.

The Dow is extremely overbought thanks to Boeing, 3M and Goldman Sachs. The index fought the 22,000 level all day and the finish was still in doubt until the last 4 minutes of trading when market makers juiced the Dow stocks to guarantee a close over that level. The rallies in the various Dow stocks, especially Boeing, are begging for profit taking. With the weak August period just ahead, this is an accident waiting to happen. There are no guarantees but the path of least resistance is lower.

The Russell was the first index to roll over last Wednesday and has broken through support at 1,425 with a 1.1% drop on Wednesday. This is negative for market sentiment.

The divergence between the Dow and the other indexes, plus the post earnings depression now beginning to appear, has damaged a lot of the charts. They either look like Boeing with a major spike higher or they look the opposite with large gaps lower as the result of earnings. We did get to choose from a broader number of stocks this week, since two-thirds of the S&P have reported earnings, but the number of desirable charts with decent premiums were minimal. You will see that most of the optional plays were call spreads because we do not want to sell puts in a down market and most of the charts were negative.

S&P futures are -2.75 as I type this but that could be erased in an instant by some event overseas.

I wrote last Wednesday, "When volatility returns it seldom arrives slowly. It tends to arrive suddenly and violently. Be prepared." The bottom fell out of the Nasdaq at 12:30 on Thursday with a 143 point drop. That can happen again at any time. Always be prepared.

Enter passively, exit aggressively!

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

Leftover Stock

Current Position Changes

RH - RH Inc (Put Spread)

The stock rolled over at $80 and is taking the elevator down. The company bought back 50% of their stock in the first six months of 2017 and the buyback program ended. Now the shorts are killing it.

I seriously doubt the long put will regain value over the next two weeks but shares have fallen $20 in the last two weeks so anything is possible.

Closed Aug $50 short put, entry .87, exit .57, +.30 gain.
Retain Aug $40 long put, entry .67, currently zero. No stop loss.

IWM - Russell 2000 ETF (Put Spread)

The monster intraday drop last Thursday killed both of our IWM put spreads. The ETF fell to 141.55 on Thursday and is still declining. If the typical August weakness appears we could see out long puts turn profitable.

Closed Aug $134 short put, entry $1.04, exit .30, +.74 gain.
Retain Aug $128 long put, entry .52, currently .10. Profit stop $136.

Closed Sep $135 short put, entry .75, exit $1.03, -.38 loss.
Retain Sep $129 long put, entry .41, currently .54, Profit stop $136.

ADBE - Adobe Systems (Put Spread)

The Nasdaq crash on Thursday knocked $6 off Adobe intraday and stopped us out of the short side on the put spread. I considered reinstating it but the continued Nasdaq weakness suggests the stock will decline further. This is a September position so we have plenty of time to watch it and sell a new put when the time is right.

Closed Sep $140 short put, entry $1.26, exit $2.46, -1.29 loss.
Retain Sep $130 long put, entry .51, currently .40, no stop loss.

SPY - S&P-500 ETF (Put Spread)

The Nasdaq crash on Thursday knocked $3 off the SPY intraday to stop us out of the SPY short put position. This was an August position and I do not anticipate replacing it. We have a long $220 put but it would take a significant market correction over the next two weeks to create any value.

Closed Aug $230 short put, entry .97, exit .28, +.69 gain.
Retain Aug $220 long put, entry .44, currently .06, profit stop 50 cents.

NTNX - Nutanix (Covered Call)

I recommended closing the NTNX position last week because the stock was declining. The Thursday market decline knocked it $2 lower so we exited just in time.

Closed NTNX shares, entry $24.48, exit $23.23, -1.25 loss.
Closed Aug $25 short call, entry $1.42, exit .60, +.82 gain.
Net loss 43 cents.

New Recommendations

BA - Boeing (Call Spread)

Boeing gained $34 last week alone and they are up $70 since May. While it is always possible for them to rise, there should be some profit taking very soon. If the market moves lower starting next week, the Dow stocks are going to be a big target because of their big gains.

Sell short Sept $250 call, currently $1.37, stop loss $245.
Buy long Sept $260 call, currently .36, no stop loss.
Net credit $1.01.

NFLX - Netflix (Call Spread)

Netflix added $31 after earnings to hit $191.50. Shares have already declined $10 to close at $181 today. I am recommending a $200/$215 call spread because I expect the August weakness to appear. The Nasdaq has had a bad five days and it may get worse.

Sell short Sept $200 call, currently $1.54, stop loss $190.50.
Buy long Sept $215 call, currently .51, no stop loss.
Net credit $1.03.

New Covered Call Recommendations

AXON - Axovant Sciences

With the markets so choppy I could not find any covered call candidates to recommend. However, I did find Axovant. The premiums are extreme for two reasons. They have earnings on Sept 12th (expiration 9/15) and they have a drug trial that ends in late September on dementia. The drug calendar says Sept 30th for the results, which would be after expiration. However, there is always the wild card that they could announce early if the trials were positive. Shares would explode and everybody is happy. If the trials are negative they would probably wait until the last minute to report them on Sept 30th.

This is NOT an official recommendation but aggressive traders may want to roll the dice.

Sept $25 call, currently $4.20.

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.

September expiration is the 15th.

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.

ADBE - Adobe Systems (Put Spread)

Adobe has a great chart except for the May/June Nasdaq declines. Shares are about to breakout to a new high.

Expected earnings September 19th.

Sell short Sept $140 put, currently $1.20, stop loss $144.65
Buy long Sept 130 put, currently .43, no stop loss.
Net credit 77 cents.

BZUN - Baozun (July Covered Call)

Baozun dipped with the Nasdaq and is now recovering. They are breaking through the 2-week resistance and should return to the higher levels from before the crash.

Earnings August 15th.

Buy-write BZUN July $22.50 call, currently $21.58-$1.00, stop loss $19.45

COST - Costco (Put Spread 7/12)

This is a risky position. Costco has fallen $30 in the last 3 weeks after Amazon announced the acquisition of Whole Foods. Even though the acquisition will more than likely not be final until Q1-2018, Costco has been killed. I personally do not believe it would have any impact to their business until 2019 at the earliest. I am a strong buyer of Costco at this level, but I have already been blown out of two positions where I bought the dip. Support is $150 and the stock is holding at $151. Eventually, somebody is going to upgrade them on price and this stock will turn into a rocket. Until that happens, there is always the risk of another decline.

Earnings August 25th.

Sell short Aug $145 put, currently $1.62, stop loss $147.85.
Buy long Aug $135 put, currently .50, no stop loss.
Net credit $1.12.

IWM - Russell 2000 ETF (Put Spread 7/6)

The Russell is right on the verge of breaking out to a new high. The relative strength over the last three weeks has been stronger than the big cap indexes.

Sell short Aug $134 put, currently .90, initial stop loss $137.85
Buy long Aug $128 put, currently .44, no stop loss.
Net credit 46 cents.

IWM - Russell 2000 ETF (Put Spread 7/26)

The Russell 2000 is slowly easing higher and closed at a new high on Tuesday. We need one more good day to really trigger a breakout and that could drag the other indexes higher.

Sell short Sep $135 put, currently .89, stop loss $138.85.
Buy long Sept $129 put, currently .40, no stop loss.
Net credit 49 cents.

NTNX - Nutanix Inc

Goldman added the stock to their conviction buy list saying there was a 53% upside potential. Goldman called Nutanix a '"hyperconverged infrastructure company," a "once-in-a-decade tech infrastructure story," as they see strong adoption of the technology among chief information officers. Based on a survey Goldman did in June they found that 18% of CIOs expected to move to this technology over the next two years with Nutanix the leader in the field. They also said the company could easily be an acquisition target because of their size and revolutionary technology. Shares have risen sharply since the upgrade.

Earnings August 24th.

Buy-write Aug $25 call, currently $24.41 - $1.40, initial stop $21.65.

RH - RH Inc (Short Put Spread)

RH, formerly Restoration Hardware, has been on a rocket ride higher. The company change its business model to a member subscription model like Costco and the stock is on fire.

Expected earnings August 31st.

Sell short Aug $50 put, currently $1.75, stop loss $52.35.
Buy long Aug $40 put, currently .85, no stop loss.
Net credit 90 cents.

Update 7/12/17: RH was doing great with a long sustained rally until Monday. Shares declined $7 from Friday's high of $69.25 to a low of $61.20 to stop us out at $61.35. After two days of declines, the stock rebounded to its prior highs.

I am going to recommend we reenter this position in order to offset the premium on the long put.

Closed Aug $50 short put, entry $1.72, exit $1.91, -.19 loss.

Sell short Aug $50 put, currently .80, initial stop loss $58.65.

Retain Aug $40 long put, entry .67, currently .20. No stop loss.

RH - RH Inc (Short Put)

RH is on a rocket ride higher since they changed their business model. This put is currently $17 OTM with the stock making new highs.

Earnings Aug 31st.

Sell short Aug $50 put, currently $1.10, initial stop loss $61.50.

Update 7/12/17: RH was doing great with a long sustained rally until Monday. Shares declined $7 from Friday's high of $69.25 to a low of $61.20 to stop us out at $61.35. After two days of declines, the stock rebounded to its prior highs.

I am not recommending we renter this position. We are already exposed with the spread position and the premiums have declined to the point where a naked put does not make sense.

Closed Aug $50 short put, entry $1.30, exit $1.81, -.61 loss.

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.

Update 5/3/17: 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.

Update 5/3/17: 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.

SPY - S&P-500 ETF (Put Spread)

The S&P is holding near its highs and the earnings cycle starts next week. This should give the market a positive bias for the next three weeks, assuming earnings are positive.

Sell short Aug $230 put, currently .82, initial stop loss $235.00
Buy long Aug $220 put, currently .40, no stop loss.
Net credit 42 cents.

URI - United Rentals (Call Spread)

United reported earnings after the close of $2.37 that beat estimates for $2.31. Revenue of $1.6 billion beat estimates for $1.55 billion. They guided for full year revenue in the $6.25-$6.40 billion range. That was up from the prior guidance of $6.05-$6.25 billion and above analyst estimates for $6.23 billion. Shares rose $4 in afterhours to $122, which has not been factored into the options yet.

I am recommending the $135/$145 calls because there is strong resistance at $125-$126 and post earnings depression will probably prevent a breakout.

With the stock rising $4 in afterhours I am betting the call premiums will spike at the open. The values below are my estimates only.

Sell short Aug $135 call, est $1.70, stop loss $128.25.
Buy long Aug $145 call, est .35, no stop loss.
Net credit estimate $1.35.

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.