Thursday, February 01, 2018  12:52:12 AM

Whipsaw Trading

by Jim Brown

Click here to email Jim Brown
Review prior updates here: 2014  2015  2016  2017  2018 
The Dow reversed another 287 points intraday as gains turned into losses.

The Dow reversed a +262 point gain into a -25 point loss intraday before rebounding slightly at the close. This was the fourth intraday reversal of nearly 300 points in the last two weeks. This kind of volatility kills investor sentiment and traders turn negative on the market because they don't know where it is going. When you buy a strong bounce with visions of new highs only to have it turn into losses several hours later, it wears on your nerves. After 2-3 of these, the incentive to buy the dip fades.

Thursday is the last big day for tech earnings. After Apple, Amazon, Alibaba and Google report, the potential increases for a post earnings depression cycle. The excitement of holding over a big earnings release fades when the size and quality of the earnings reporters begins to fade next week. There are still a lot of companies to report but the giants will be behind us.

The major indexes are no longer testing new highs and the urgency to buy something in the Fear of Missing Out (FOMO) rally has faded. Now investors are looking at stocks well off their highs and wondering if it is a dip or the beginning of a drop.

If it were not for Boeing's 114 point contribution to the Dow today, the index would have finished significantly negative. The Boeing lift kept traders from selling the ETFs and gave the illusion the market was fine even when it was declining. Tomorrow that 100-point lift will be absent.


The Dow dropped to within a few points of initial support at 26,000 before rebounding on Tuesday. Today's round trip from the 262-point intraday gain back to negative territory was a retest that came within 50 points of that level again. This is the line in the sand. If the Dow dips below 26,000 it could trigger a lot of sell stops.


Last week Bank of America warned of a potential 6% decline to 2,686 and we are off to a good start if the market does not recover quickly. The longer it wanders below the highs, the better the chance it will decline further.


The Nasdaq has tested support at 7,400 for two consecutive days with intraday moved just below that level. This is the critical sentiment support for the Nasdaq. A material move below that level could trigger significant additional selling.


I was surprised the increased volatility did not increase the option premiums. The call premiums decline because expectations have faded but the put premiums have not increased.

I looked at nearly 500 hundred charts today and there are a lot of broken charts. I am surprised the indexes are doing as well as they are given the number of declines. The A/D line on the small caps was 3:1 decliners over advancers today and the Russell did close with an 8-point loss.

I would be very cautious entering new trades on Thr/Fri. We are heading into another government shutdown cycle that will probably be longer and more hostile than the last one. With earnings peaking this week and next, there is less incentive to be in the market with lots of negative headlines.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email



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

No Current Covered Calls



Current Position Changes


PANW - Palo Alto Networks (Feb Call Spread)

We were stopped out of the short side several weeks ago and we stopped out of the long call side last week.

Closed Feb $170 long call, entry .60, exit .45, -.15 loss.
Previously closed: Feb $160 short call, entry $1.68, exit $1.12, +.56 gain.
Net gain 41 cents.



RH - RH Inc (Feb Short Put)

We had a tight stop on this position and we exited the play when the stock rolled over on Tuesday.

Closed Feb $77.50 short put, entry $2.25, exit .43, +$1.82 gain.



YY - YY Inc (Feb short put)

YY crashed with the market on Tuesday to stop us out. One position was profitable, the recently entered position was not.

Closed Feb $105 short put, entry $1.75, exit .15, +$1.60 gain.

Closed Feb $120 short put, entry $1.47, exit $2.90, -1.43 loss.



AAP - Advance Auto Parts (Feb Short Put)

AAP decline with the market to stop us out.

Closed Feb $100 short put, entry $1.50, exit .70, +$.80 gain.



VMW - VMWare (Mar Short Put)

News broke that Dell was considering a reverse merger with VMW, where it already owns 80% of the stock, and the bottom fell out of the stock. We were stopped for a big loss on the big drop since the velocity was extreme from the $165 high the day before.

Closed Mar $125 short put, entry $1.85, exit $3.70, -1.85 loss.



New Recommendations


LRCX - Lam Research (Mar Put Spread)

LRCX has been respecting the 100-day average as support for a long time. It is currently on the average and also on horizontal support at $188.50. In theory it should bounce from here.

Expected earnings April 26th.

Sell short Mar $170 put, currently $2.10, stop loss $182.50.
Buy long Mar $160 put, currently $1.05, no stop loss.
Net credit $1.05.



DPZ - Dominos Pizza (Mar Short Put)

Dominos is soaring. The stock has rallied $50 since November. The $190 put is $26 OTM and still has a good premium.

Expected earnings Feb 27th. We will be out before earnings.

sell short Mar $190 put, currently $2.00, stop loss $206.50.



WYNN - Wynn Resorts (Mar Short Put, Put Spread)

I am sure everyone has heard about the disaster that struck WYNN shares last week. Steve Wynn was accused of sexual harassment and the stock fell nearly $45 in a knee jerk reaction to the news. I believe the worst is over since the stock has already lost $4.5 billion in market cap. Wynn is old (76), blind and the board is likely to eject him from the business. He owns 11.8% of the outstanding shares and his net worth has already declined by $450 million over the last week. The best thing he could do would be to resign and let the stock rebound. I am sure the board will explain it to him.

Expected earnings April 23rd.

Sell short Mar $140 put, currently $1.82, stop loss $153.50.

You could also play this as a spread:

Sell short Mar $140 put, currently $1.82, stop loss $153.50.
Buy long Mar $125 put, currently .80, no stop loss.
Net credit $1.02.



New Covered Call Recommendations


No New Covered Calls

Increasing market volatility and the current earnings cycle makes covered calls dangerous at this time.


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.

February expiration is the 16th. March expiration is the 16th.

Earnings dates are never guaranteed. Sometimes the dates change 2-3 times depending on various factors. In most cases the dates are provided by a third party like Zacks and they are using predictions based on the prior earnings. If a company reports on Wednesday Jan 24th then they expect them to report on a Wednesday around the 24th in April. The majority of the time they are close and once we move nearer to April, the company will announce when they are going to report and the calendar is updated. If you are in a position, you should always check at least weekly to see if an earnings date has been posted.




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.


AAOI - Applied Optoelectronics (Jan Short Put)

This stock behaved very well on Wednesday and actually posted a gain of 62 cents when the tech world was crashing. With this kind of relative strength it should do well in a positive market.

Earnings Feb 8th.

Sell short Jan $35 put, currently $1.60, initial stop loss $39.50.

Update 12/13: Last week I recommended closing the short put at the open on Thursday. Unfortunately, AAOI gapped down on Thursday and the option exploded higher to put us into a loss for the position. Sometimes if it were not for bad luck, we would have no luck at all.

Closed Jan $35 short put, entry $1.60, exit $2.13, -.53 loss.


AAP - Advance Auto Parts (Feb Short Put 1/10)

Shares rocketed higher in 2018 and have stalled in the $110 range. There were multiple articles on why auto parts manufacturers will thrive in 2018. Comparisons to Q1-2017 will be easy and earnings should rise. Full employment will fuel the auto market. Credit Suisse said AAP had the most potential for upside in 2018 when compared to ORLY and AZO.

Earnings Feb 13th.

Sell short Feb $100 put, currently $1.15, stop loss $107.85.


ADBE - Adobe Systems (Feb Put Spread 1/3)

Adobe shares were recovering from the December weakness before the January bounce. They are now approaching their November highs.

Earnings March 15th.

Sell short Feb $170 put, currently $1.86, stop loss $175.00
Buy long Feb $160 put, currently .78, no stop loss.
Net credit $1.08.

Update 1/24: We closed both sides of the Adobe position at the open on Thursday.

Closed Feb $170 short put, entry $1.64, exit .47, +$1.17 gain.
Closed Feb $160 short put, entry .60, exit .33, -.27 loss.
Net gain 90 cents.


ADBE - Adobe Systems (Feb Short Put 1/3)

Adobe shares were recovering from the December weakness before the January bounce. They are now approaching their November highs.

Earnings March 15th.

Sell short Feb $170 put, currently $1.86, stop loss $175.


COST - Costco (Feb Put Spread 1/3)

Costco dropped from the earnings spike to find support at $185. Shares are rebounding strongly and that support give us a perfect stop loss point.

Earnings March 15th.

Sell short Feb $180 put, currently $1.30, stop loss $185.
Buy long $170 put, currently .55, no stop loss.
Net credit .75 cents.

Update 1/10/18:

COST - Costco (Feb Put Spread)

Costco fell through support when the market opened sharply lower on Wednesday on China fears. We were stopped out of the Feb short put. I considered reselling the short put but with support broken and retailing season over, I was concerned COST could continue lower. Our long put is too far out of the money to have a decent chance of rising in value. I am recommending we close it while it still has value.

Closed Feb $180 short put, entry $1.08, exit $2.00, -.92 loss.
Close Feb $170 long put, entry .57, currently .57.


CP - Canadian Pacific (Mar Put Spread 1/24)

Shares have seen some significant volatility over the last two weeks but surged to close at a ne whigh on Wednesday. Cowen reiterated an outperform last week with a price target of $207. They reported earnings on the 18th that beat the street and announced several programs to increase rail traffic including strategic opportunities to increase crude by rail.

Expected earnings April 19th.

Sell short Mar $175 put, currently $1.95, stop loss $181.35.
Buy long Mar $160 put, currently .60, no stop loss.
Net credit $1.35.


FIZZ - National Beverage Corp (Feb Put Spread 12/21)

FIZZ reported earnings on Dec 6th and shares posted a decent gain. The very next day shares dropped -$13 on no news. In retrospect analysts were not impressed with the earnings growth. Since that drop shares have been rebounding steadily.

Expected earnings March 8th.

Sell short Feb $95 put, currently $2.15, stop loss $99.85.
Buy long Feb $85 put, currently $1.00, no stop loss.
Net credit $1.15.

Update 12/27: Uptrend support broke on Friday and we were stopped on the gap lower open on Tuesday. If the 200-day average at $100 fails our long put could come into play.

Closed Feb $95 short put, entry $2.35, exit $3.70, -1.35 loss.
Retain Feb $85 long put, entry .93, currently $1.20, no stop loss.

Update 1/10/18: We were stopped out of the short side the prior week and the long side was stopped on Monday.

Closed Feb $85 long put, entry .93, exit .70, -.23 loss.
Previously closed Feb $95 short put, entry $2.35, exit $3.70, -1.35 loss.
Net loss -1.58.


JACK - Jack in the Box (Feb Call Spread 12/27)

JACK spiked with earnings but has been fading ever since. The food borne illnesses at Chipotle has been weighing on Qdoba, which is owned by JACK. Shares are on the verge of closing at a three month low.

Earnings Feb 13th.

Sell short Feb $105 call, currently $1.75, stop loss $103.00
Buy long Feb $115 call, currently .45, no stop loss.
Net credit $1.30.

Update 1/10/18: We were stopped out of the short side of the spread when Jack suddenly spiked on Jan 5th to $102.50. The downward trend is continuing but the volatility knocked us out. I considered reselling the call but the premiums have evaporated.

Closed Feb $105 call, entry $2.00, exit $1.40, +.60 gain.
Close Feb $115 call, entry .37, currently .13.


JUNO - Juno Therapeutics (Feb Short Put 12/27)

Juno is rebounding from the December lows with a nice steady move higher. There is solid support at $42.50. Earnings are January 31st so we will have to close the position before expiration.

Earnings Jan 31st.

Sell short Feb $40 put, currently $1.45, stop loss $44.00.


MU - Micron (Covered Call 1/17)

Micron has been volatile over the last several weeks with a sideways pattern. On Wednesday, shares found some traction and moved higher. Support at $41.50 has held for 6-weeks.

Earnings March 2nd.

Buy-write Feb $44 call, currently $44.26-$2.42, stop loss $41.85

Update 1/24: Micron never regained momentum and moved sideways for the week but the sharp drop at the open on Monday stopped us out.

Closed MU shares, entry $44.21, exit $41.85, -$2.36 loss.
Closed Feb $44 short call, entry $2.34, exit $1.03, +$1.31 gain.
Net loss 1.05.


MARK - Remark Holdings (Covered Call 1/10)

Remark is a technology company focused on development and deployment of artificial intelligence (AI) solutions. They have recently partnered with Alibaba, Sina, Weibo, Acxiom and others. The stock is exploding higher.

Earnings Feb 12th.

Buy-write Feb $15 call, currently $14.17-$1.60, stop loss $11.85.

Update 1/24: Remark lost its momentum after the second peak on the 18th and it has been a slow decline.

Closed MARK shares, entry $13.82, exit $12.15, -1.67 loss.
Closed Feb $15 short call, entry $2.00, exit .65, +$1.35 gain.
Net loss 32 cents.


NVDA - Nvidia (Feb Put Spread 12/21)

Nvidia rolled over with the semiconductor sector when the nasdaq sector rotation hit in late November. Shares dipped to the 100-day then rebounded. The second big cap tech dip in early December knocked the stock back to the 100-day once again and it bounced again. That level has been decent support. I am hoping the $37 drop from the highs has eliminated most of the sellers. The stock has more going for it today than it did a month ago after some recent product announcements.

Expected earnings Feb 13th.

Sell short Feb $170 put, currently $2.79, initial stop loss $183.65.
Buy long Feb $160 put, currently $1.59, no stop loss.
Net credit $1.20.

Update 1/24:

NVDA - Nvidia (Feb Put Spread)

We closed the short put at the open on Thursday.

Closed Feb $170 Short Put, entry $2.83, exit .29, +2.54 gain.
Retain Feb $160 Long Put, entry $1.44, currently .06. No stop loss.


NVDA - Nvidia (Feb Put Spread 1/10)

Nvidia impressed everyone at CES once again and shares are threatening to break throguh resistance at $224 and make a new high. We already have a NVDA put spread but nothing keeps us from adding another one.

Earnings Feb 13th. Must close before earnings.

Sell short Feb $190 put, currently 1.62, stop loss $208.65.
Buy long Feb $175 put, currently .61, no stop loss.
Net credit $1.01.


PANW - Palo Alto Networks (Feb Call Spread 12/20)

Palo Alto reported good earnings back on Nov 20th and shares spiked to $152 then faded. The stock has been trading listlessly between $140-$150 for the last month. There is no upward momentum. I think getting through that $152 level over the next several weeks is going to be difficult in a potentially volatile market.

Expected earnings Feb 19th.

Sell short Feb $160 call, currently $1.57, initial stop loss $152.85.
Buy long Feb $170 call, currently .55, no stop loss.
Net credit $1.02.

Update 1/3/18: Shares rebounded with the market on Tuesday and stopped us out of the short call.

Closed Feb $160 short call, entry $1.68, exit $1.12, +.56 gain.
Retain Feb $170 long call, entry .60, currently .24, no stop loss.


PANW - Palo Alto Networks (Feb Put Spread 1/17 )

We tried a call spread recently but the stock recovered and began rebounding. It closed just pennies from a new high on Wednesday. I am going to try a put spread this time.

Earnings Feb 19th.

Sell short Feb $145 put, currently $1.54, stop loss $148.65.
Buy long Feb $135 put, currently .51, no stop loss.
Net credit $1.03.


RH - RH Inc (Restoration Hardware) (Feb Short Put 1/3)

Shares found support at $85 and rebounded with the strong market. They are doing well selling into the hurricane recovery areas.

Earnings March 6th.

Sell short Feb $77.50 put, currently $2.15, stop loss $84.85.


RHT - Red Hat Inc (Mar Short Put 1/24)

Red Hat shares have been moving slowly higher. They were up in a weak tech market on Wednesday and closed only about 35 cents from a new high.

Expected earnings March 20th.

Sell short Mar $120 put, currently $1.90, initial stop loss $124.65.


VMW - VMWare (Mar Short Put 1/24)

VMWare closed at a new high on Tuesday and only declined slightly in the Nasdaq sell off on Wednesday. They have a strong chart after coming back from the December dip.

Earnings March 1st. We must close before earnings.

Sell short Mar $125 put, currently $1.85, initial stop loss $133.50.


YY - YY Inc (Feb Short Put 1/3)

YY has a steady chart with the last touch of the 50-day average back in July. The December dip has been erased and the stock is retesting the recent highs.

Earnings Feb 13th. We need to exit before expiration.

Sell short Feb $105 put, currently $2.15, stop loss $111.25.


YY - YY Inc (Feb Short Put 1/17)

YY is testing the recent highs and Wednesday's close was only 30 cents from a new high. Good steadyuptrend since the dip in late November.

Earnings Feb 13th.

Sell short Feb $120 put, currently $1.50, stop loss $124.85.


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.