Thursday, September 14, 2017  12:22:34 AM

Step by Step

by Jim Brown

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Review prior updates here: 2014  2015  2016  2017  2018 
The major indexes are creeping higher step by step.

The Dow, Nasdaq and S&P closed at new highs on Wednesday but it was in doubt until the very last minutes of trading. The S&P and Nasdaq were both negative until a last minute surge of buying. The Dow closed at a new high but remains 19 points under its prior intraday high.

Despite the gains over the last three days there does not seem to be any excitement in the market. Monday was a relief rally short squeeze that North Korea did not launch any missiles over the weekend. Tuesday's gains were decent but without excitement and Wednesday was total boredom until the close.

Despite the lackluster trading the volume was the highest since last Thursday at 6.2 billion shares. That is still low but probably increased because of the quadruple witching expiration on Friday. Traders are squaring positions ahead of that expiration.

With the normal September political volatility postponed until December, there is no wall of worry for the markets to climb. The Fed meeting next week is the only pothole in the rally road and it should be minor.

When there are no obvious reasons why the market should decline and everything begins to look bullish, that is a good time to be trimming your positions. For some reason the market never likes an obviously bullish setup.

Every Wednesday I look at hundreds of charts while scanning for plays. I was surprised how many charts were broken today. There was a lot of short-term failed rallies with 2-3 days of declines despite the new market highs. The A/D line for the entire market was almost dead flat at 3628 advancers to 3439 decliners. That means nearly half the stocks in the market declined on a day when all the major indexes closed at record highs. That is not a good sign.

The S&P gained 2 points right at the close to push it even closer to the strong psychological resistance at 2,500. That is going to be a sell target for the algorithmic trading computers. It is a big round number that is higher than the average analyst target for the end of the year. If we did not have a sell the news event at 2,500 I would be very surprised. In fact, our close at 2,498.37 should be close enough for the sell programs to kick off on any weakness.

The Dow moved to within 19 points or a new intraday high and could see round number resistance at 22,200. I am concerned the Dow chart could turn into a double top unless we see a strong day where we blow through that resistance.

The Nasdaq closed only half a point under the old intraday high at 6,460.84. Considering Apple and all its suppliers traded down for the day, the surge at the close was surprising. The round number resistance at 6,500 could be the next challenge. Those big even numbers tend to be trouble spots unless the market is moving quickly.

As we head into expiration Friday for September, the premiums on the October strikes have faded. There were not as many choices this week as we had last week. There were no earnings dates to worry about but the large number of broken charts were a challenge.

The market volatility has died again and that was another drag on premiums. September is known for volatility and it could appear at any time even though the political issues have been kicked down the road.

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

NVDA - Nvidia (Oct Call Spread)

We had already closed the short side in order to capture gains when Nvidia was moving higher. We put a stop loss of $163.25 on the long call in order to preserve some premium if Nvidia rolled over. That happened on Friday and we were stopped out. Of course Nvidia rebounded again almost immediately.

Closed Oct $195 long call, entry $1.67, exit .59, -1.08 loss.
Previously closed: Oct $185 short call, entry $2.98, exit $2.15, +.83 gain.
Net loss 25 cents.

WDC - Western Digital (Oct Put Spread)

Western got some bad news on Friday that Toshiba was probably going with another bidder on the chip sale. Shares plunged late Friday afternoon to stop us out on the short side.

Closed Oct $77.50 short put, entry $1.33, exit .93, +.40 gain.
Retain Oct $67.50 long put, entry .33, currently .19. No stop loss.

BA - Boeing (Oct Call Spread)

Boeing announced midday Wednesday they were going to increase production on the 787 Dreamliner from 12 to 14 planes a month or an additional 24 planes a year starting in 2019 due to rising order volumes. At a curent cost of $306 million each, that is an additional $7.3 billion in revenue each year. Boeing has already produced 489 of the planes and has an order backlog of 721 planes ($220 billion). Shares exploded higher and stopped us out at $242.

I am not closing the long call just in case the stock price continues to rise. If shares roll over, we can sell another call.

Closed Oct $245 short call, entry $2.40, exit $4.00, -1.60 loss.
Retain Oct $255 long call, entry .65, currently $1.19. No stop loss.

SLCA - US Silica (Update)

Fortunately, oil prices and energy equities have begun to rise again. SLCA has rebounded $5 over the last two weeks and should continue to rise long term as long as oil prices remain firm in the $50 range. Oil closed at $49.23 today. Saudi Arabia is further reducing exports in an attempt to shore up prices. U.S. producers are reducing rig counts and the IEA increased demand estimates today. Everything is moving in our direction but it may take a long time to get back to where we started.

New Recommendations

AAOI - Applied Optoelectronics (Oct Put Spread)

AAOI took a fall in early August and shares have been slowly declining until they found support at $56 about a week ago. There has been a slight uptick and Wednesday saw a 3% gain on no news. The premiums $10 OTM are good and with support at $56 I am willing to try a put spread.

Earnings Nov 3rd.

Sell short Oct $50 put, currently $2.55, stop loss $55.50.
Buy long Oct $40 put, currently $1.00, no stop loss.
Net credit $1.55.

NFLX - Netflix (Oct Short Put)

Netflix shares have gone vertical since they found support at $165. Multiple upgrades plus the T-Mobile promotion offering a Netflix account with every phone purchase and activation. The put I am recommending is $20 OTM and we should be able to stop out before any real danger appears.

Earnings Oct 17th, 3 days before expiration but we will exit early.

Sell short Oct $165 put, currently $2.65, stop loss $172.50.

New Covered Call Recommendations

No Covered Calls

See the optional play graphic for a list of potential covered calls.

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.

October expiration is the 20th.

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.

Update 8/2/17: 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.

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.

Update 8/30/17: Boeing continues to win deals almost daily and their backlog is growing. We wrote the call spread on the assumption that big spike from earnings would fade. It did for a couple weeks but the rebound back over resistance stopped us out on the short side for a decent gain.

Closed Sept $250 short call, entry $1.28, exit .35, +.93 gain.
Retain Sept $260 long call, entry .39, currently .08, no stop loss.

BA - Boeing (Oct Call Spread)

Boeing surged on earnings but stalled at $240 for the last six weeks. They are finally starting to give back some of their gains after the UTX/COL acquisition announcement. If they break below $232 it could be a sharp drop.

Earnings Oct 26th.

Sell short Oct $245 call, currently $2.30, initial stop loss $242.00.
Buy long Oct $255 call, currently .75, no stop loss.

Net credit $1.55.

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.

Update 8/2/17: 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 Sep $135 short put, entry .75, exit $1.03, -.38 loss.
Retain Sep $129 long put, entry .41, currently .54, Profit stop $136.

Update 8/20/17: The Russell 2000 has been the weakest index and the ETF declined to our profit stop at $136 on August 11th to take us out of the position. In retrospect, I wish it was still open but we exited with a profit and we should not complain.

Closed Sept $129 long put, entry .41, exit $1.13, +.72 gain.
Previously closed Sept $135 short put, entry .75, exit 1.03, -.28 loss.
Net gain 44 cents.

KITE - Kite Pharma (Oct Put Spread)

Kite closed at a new high on Friday and has a very strong chart. The put spread Iam recommending is $20 OTM. If the current rally continues even a few more days we should be comfortably safe for weeks to come.

Earnings Nov 7th.

Sell short Oct $110 put, currently $2.85, stop loss $119.35
Buy long Oct $100 put, currently $1.30, no stop loss.
Net credit $1.55.

Update 9/6/27: We closed the short side at the open last Thursday after Kite was bought by Gilead Sciences.

Closed Oct $110 short put, entry $2.90, exit .10, +$2.80 gain.
Retain Oct $100 long put, entry $1.40, currently zero, will expire worthless.

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.

Update 8/30/17: We had a call spread on Netflix until the stock took off like a rocket on Wednesday with a $6 gain on an analyst upgrade. We were stopped out on the short call for a whopping 7 cents and a nice gain.

Closed Sept $200 short call, entry $1.64, exit .07, +$1.57 gain.
Retain Sept $215 long call, entry .49, currently .01, no stop loss.

NFLX - Netflix (8/3 Oct Short Put)

Netflix is currently fading from the $25 post earnings spike and is currently at $166. The recommend put is $130 and $36 OTM today. There is strong support at $158, $146 and $140.

Earnings Oct 17th. (3 days before expiration)

Sell short Oct $130 put, currently $1.09, stop loss $139.

NFLX - Netflix (8/30 Oct Short Put)

We already have a short put position on Netflix but today's $6 spike knocked us out of the spread position with a gain. I am adding a new spread position to take advantage of the rebound.

Earnings Oct 17th.

Sell short Oct $155 put, currently $2.93, stop loss $163.85.
Buy long Oct $140 Put, currently $1.11, no stop loss.
Net credit $1.82.

NTNX - Nutanix (Oct Covered Call)

Nutanix spiked on earnings at the open on Friday then saw some post earnings selling. The rebound was bought aggressively and shares closed at a 6-week high on Wednesday.

Earnings Nov 30th.

Buy-write Oct $22.50 call, currently $22.48-$1.50, stop loss $19.85.
Gain if called $1.52.

NVDA - Nvidia (Oct Call Spread)

Nvidia's chart is showing a wide rounding top formation with solid resistance at $170. I do not think the stock is done going higher but I do believe it is going to rest over the next six weeks of normal market weakness. The $170 resistance gives us a good threshold to set our stop loss.

Earnings Nov 9th.

Sell short Oct $185 call, currently $2.80, stop loss $175.25.
Buy long Oct $195 call, currently $1.49, no stop loss.
Net credit $1.31.

Update 9/6/17: We closed the short call at the open last Thursday. Retain the long call just in case Nvidia explodes higher.

Closed Oct $185 short call, entry $2.98, exit $2.15, +.83 gain.
Retain Oct $195 long call, entry $1.67, currently .80.

NVDA - Nvidia (Oct Short Put)

Nvidia shares continue to rebound even in the face of a weak market. Their multiple new offerings with speeds 10-12 times faster than their best offerings currently, suggests they are going to continue to dominate the sector.

Earnings Nov 7th.

Sell short Oct $140 put, currently $1.67, stop loss $152.65.

PRTK - Paratek Pharmaceuticals

Paratek soared on Aug 23rd when news leaked out the company was considering a sale. They have several great drugs in the pipeline and apparently several other companies have approached them about an acquisition. There is no guarantee and should they announce there is no sale imminent the gains could evaporate just as quickly. They are in a good position for a sale and already have a marketing partnership with Allergan.

As in trader, you have to weigh the potential $5.30 in gains against a potential drop back to $20.

Earnings Nov 3rd.

Buy write Oct $30 call, currently $26.55-$1.85, stop loss $23.65.
Gain if called $5.30.

PXD - Pioneer Natural Resources (Put Spread)

Pioneer disappointed on earnings by reducing guidance. They are going to spend more but defer 30 new wells from 2017 to 2018 and that impacted their production guidance and revenue. Shares fell more than $30 after earnings. This is a major buying opportunity so the worst should be over.

Earnings Oct 31st.

Sell short Sept $125 put, currently $1.40, initial stop loss $128.50.
Buy long Sept $110 put, currently .45, no stop loss.
Net credit 95 cents.

Update 8/23/17: Pioneer moved more or less sideways for the last three weeks after the big post earnings decline. That changed on Monday when oil prices cratered and PXD stopped us out at $128.50.

Closed Sept $125 short put, entry $1.55, exit $2.46, -.91 loss.
Retain Sept $110 long put, entry .40, currently .10, no stop loss.

SHOP - Shopify (Sept Call Spread)

SHOP posted blowout earnings and spiked to $104 but the post earnings depression period and the weak market is taking a toll. With August typically weak, we could see SHOP return to support at $90 and consolidate.

Earnings Oct 31st.

Sell short Sept $105 call, currently $2.05, initial stop loss $100.65.
Buy long Sept $115 call, currently .80, no stop loss.
Net credit $1.25.

Update 8/23/17: Shopify has caught fire. The stock has rallied $7 in three days and $13 over the last two weeks. We were stopped out of out short call at $96.75 on Tuesday. If these gains continue we could profit from the long call.

Closed Sept $105 short call, entry $1.60, exit $1.50, +.10 gain.
Retain Sept $115 long call, entry .69, currently .70, stop loss $97.00.

SHOP - Shopify (Oct Put Spread)

We already have one position on SHOP but the stock broke out to a new high on Wednesday and appears headed even higher. This put spread has a good premium spread with a low cost long put. I could not pass it up.

Earnings Oct 31st.

Sell short Oct $95 put, currently $2.05, stop loss $100.85.
Buy long Oct $80 put, currently .50, no stop loss.
Net credit $1.55.

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.

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.

WDC - Western Digital (Oct Put Spread)

WDC is finally on track to acquire a stake in the portion of the SanDisk/Toshiba memory business it does not own. Toshiba has agreed to negotiate with WDC in an effort to speed up the transaction as opposed to fighting with them over other bidders. It appears WDC has won the battle but the fight it not yet over. Shares are rising in anticipation of a deal.

Earnings Oct 26th.

Sell short Oct $77.50 put, currently $1.36, stop loss $81.35.
Buy long Oct $67.50 put, currently .35, no stop loss.
Net credit $1.00.

X - US Steel (Oct Covered Call)

US Steel has been in a prolonged uptrend since May as the global economy appears to be accelerating. Resistance is $35.

Earnings Oct 24th.
Buy-write Oct $28 call, currently $27.51-$1.44, stop loss $25.50.
Gain if called $1.93.

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.