Thursday, March 01, 2018  3:52:49 AM

Fear of the Fed

by Jim Brown

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Review prior updates here: 2014  2015  2016  2017  2018 
Market commentators are blaming the market drop this week on worries over future rate hikes.

They have to blame the drop on something or they would have nothing to talk about on TV. There are probably multiple reasons for the decline and I am sure Powell's comments are right up there at the top of the list. However, there are other factors. Wednesday was also month end. Fund managers were caught flat footed by the market correction and once the market returned to within 3% of its highs, they took the opportunity to restructure their portfolios. That was probably with a deep sigh of relief as well.

Also hurting the market was a sharp two-day drop in crude prices. The $1.50 drop on Wednesday was carried over into the energy sector and several big energy names were down 2-3% for the day. The decline in that sector was an anchor on the S&P.

Powell did give some uncharacteristic comments for a Fed Chairman on Tuesday suggesting the rising economy and the stimulus from the tax cuts could make the committee reevaluate the pace of their rate hikes. If they did change the 2018 pace from 3 hikes to 4, it is not the end of the world. Raising rates because the economy is accelerating is a normal event. The difference between 75 basis points or 100 basis points at the end of 2018 is negligible.

I mentioned on Tuesday that the term "rate hikes" when used by a Fed Chairman is Kryptonite for the markets. Just opening that lead lined box causes investors to shrink back in fear long before they are close enough to actually cause weakness. Powell needs to leave that box closed in his testimony on Thursday and try to placate the markets or the positive investor sentiment could be damaged.

The S&P broke below the 50-day average and that probably caused some technical selling. There are portfolio managers that base their strategies simply on the 50-day. They are long over the average and flat or short under the average. Long term that will produce regular profits. The S&P has decent support at 2,700 and we should see a rebound assuming Powell does not develop foot in mouth disease once again.


The Dow accelerated to the downside in the last 30 minutes of trading when more than $2.4 billion in market on close sell orders appeared. This gives credibility to the end of month portfolio restructuring idea. Volume was heavy at 8.1 billion shares and a large amount of it was in the last hour.

The Dow has decent support at 24,700 and any further decline should rebound from that level.


The Nasdaq had risen to about 84 points below the historic high before the decline appeared. The chart is much stronger than the Dow and Nasdaq and the tech stocks should lead us higher once again when this dip cycle is over. The Nasdaq is well above initial support at 7,200 so this decline has just been a nuisance rather than a disaster.


Obviously, the nearly 400-point decline in the Dow eliminated any possibility of covered calls. It did inflate the put premiums so the potential play list is heavily populated with put play candidates.

I believe the market will rebound. There is no material reason for it to continue lower ahead of the Q1 earnings cycle. The next six weeks should produce new highs. It is after the Q1 earnings that we should worry about market direction. The summer doldrums could be painful.

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



Current Position Changes


RHT - Red Hat (Short Put)

The short March put was closed at the open last Thursday.

Closed Mar $115 short put, entry $1.40, exit .10, +$1.30 gain.



URI - United Rentals (Call Spread)

United rallied on Monday to $182 to stop us out at $181. I am recommending we reload this position using the April $200 call.

Closed Apr $195 short call, entry $2.50, exit $4.00, -1.50 loss.
Retain Apr $210 long call, entry .85, currently .90, no stop loss.

Sell short Apr $200 call, currently $1.75, stop loss $183.50.



New Recommendations


HD - Home Depot (Apr Put Spread)

Home Depot crashed on Wednesday after Lowe's disappointed on earnings and fell 6% on weak guidance. Home Depot had strong guidance and posted great earnings. Some analysts thought the guidance could have been better but HD is spending $2.4 billion remodeling stores and improving infrastructure plus a big buyback.

Earnings May 22nd.

Sell short Apr $170 put, currently $2.21, stop loss $179.25.
Buy long Apr $160 put, currently $1.00, no stop loss.
Net credit $1.21.



NVDA - Nvidia (April Put Spread)

Nvidia has been holding the recent gains. The stock did take a hit on Wednesday but tech stocks should lead out of the current dip. Nvidia should be setting new highs before the Q1 earnings cycle.

Earnings May 10th.

Sell short Apr $205 put, currently $2.24, stop loss $228.75.
Buy long Apr $190 put, currently $1.04, no stop loss.
Net credit $1.20.



SHOP - Shopify (April Short Put)

Shopify posted strong earnings and saw a nice spike in the shares. The minor post spike depression has faded and the stock even rose on Wednesday.

Earnings May 17th.

Sell short Apr $120 put, currently $2.75, stop loss $129.50.



New Covered Call Recommendations


No New Covered Calls

Increased 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.

March expiration is the 16th. April expiration is the 20th.

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.


COST - Costco (Mar Put Spread 2/14)

Shares dipped to $176 twice over four days and have rebounded to close over $187 on Wednesday. The retail sector is rebounding after a weak first half of February. Costco is Amazon proof and the best performer of the brick and mortar retailers.

Earnings March 15th.

Sell short Mar $175 put, currently $1.38, stop loss $182.00
Buy long Mar $165 put, currently .72, no stop loss.
Net credit 66 cents.


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.

Update 2/7:

CP - Canadian Pacific (Mar Put Spread)

Shares collapsed with the market since they had been in rally mode for six months. Investors ran to the exits. We were stopped on the short put for a minor loss and I am recommending we close the long put for a decent gain.

Closed Mar $175 short put, entry $1.55, exit $1.95, -.40 loss.
Close Mar $160 long put, entry .46, currently $2.00, est gain $1.54.

Update 2/14: Shares collapsed with the market since they had been in rally mode for six months. Investors ran to the exits. We were stopped on the short put for a minor loss and I recommended we close the long put for a decent gain.


Closed Mar $160 long put, entry .46, exit $1.73, +1.27 gain.
Previously Closed Mar $175 short put, entry $1.55, exit $1.95, -.40 loss.
Net gain $0.87.


DPZ - Dominos Pizza (Mar Short Put 1/31)

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.

Update 2/7:

DPZ - Dominos Pizza (Mar Short Put)

Dominos crashed with the market to stop us out of the position. The stop came on Tuesday when the market gapped down -600 points at the open. That means our fill on the exit was at the highest premium for the day.

Closed Mar $190 short put, entry $2.15, exit $5.20, -3.05 loss.


FB - Facebook (Mar Put Spread 2/7)

Facebook closed at a new high just before the market weakness began. Shares have solid support at the 100-day average at $178 and they should outperform the market. Today was an exception because of a election advertising question out of Seattle.

Earnings April 24th.

Sell short Mar $165 call, currently $1.88, stop loss $175.
Buy long Mar $150 put, currently $.65, no stop loss. Net credit $1.10.

Update 2/14: Facebook ran into a bad news cycle where every day some lawmaker, agency or country was coming down on them about privacy issues, election related issues or simple downgrades. Shares crashed through the 100-day to stop us out of the short put for a loss. I am recommending we reenter the put now that the market is recovering.

Closed Mar $165 short put, entry $1.91, exit $3.05, -1.14 loss.
Retain Mar $150 long put, entry .56, currently .29.

Sell short Mar $165 pus, currently $1.25, stop loss $171.85.


LRCX - Lam Research (Mar Put Spread 1/31)

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.

Update 2/7: LRCX collapsed in the market crash to stop us out of the short put. However, the long put has increased significantly and shares are still declining. I added a stop loss to the long put.

Closed Mar $170 short put, entry $2.20, exit $2.84, -.64 loss.
Retain long Mar $160 put, entry $.90, currently $4.07.

Update 2/14: LRCX collapsed in the market crash to stop us out of the short put. However, the long put had increased significantly and shares were still declining. I added a stop loss to the long put at $180 and that stop was hit on the 14th.


Closed long Mar $160 put, entry $.90, exit $1.80, +.90 gain.
Previously Closed Mar $170 short put, entry $2.20, exit $2.84, -.64 loss.
Net gain 26 cents.


LRCX - Lam Research (Mar Put Spread 2/14)

Lam dipped with the market to stop us out of put spread the prior week. The rebound is strong and the market is getting stronger. I am willing to try it again.

Earnings April 26th.

Sell short Mar $160 put, currently $1.60, stop loss $169.45.
Buy long Mar $150 put, currently $1.00, no stop loss.
Net credit 60 cents.


NFLX - Netflix (Apr Short Put)

Netflix has blasted off on a SpaceX rocket to new highs in the $280 range. The market dip knocked it back to $250 and buyers flooded into the stock. I am going to reach out to April on this put so I can sell $50 OTM. As we pass February expirations the premium should take the first hit. That is also when the markets should begin to trend higher and Netflix will lead on the Nasdaq.

Earnings April 23rd.

Sell April $210 put, currently $3.10, stop loss $235.


PXD - Pioneer Natural Resources (Mar Short Put/Put Spread 2/15)

After falling 10% last week, oil prices are recovering. We are entering a seasonally weak period but inventories are declining. Energy equities fell with the market and oil last week and are rebounding this week. I am recommending either a short put or a put spread on PXD.

Earnings May 8th.

Short Put:

Sell short Mar $160 put, currently $1.00, stop loss $169.65.

Put Spread:

Sell short Mar $160 put, currently $1.00, stop loss $169.65.
Buy long Mar $150 put, currently .50, no stop loss.

Net credit 50 cents.


PXD - Pioneer Natural Resources (Apr Call Spread 2/21)

We already have a put spread on PXD but this well OTM call spread appeared and March is normally a seasonally weak period for oil prices.

Earnings May 8th.

Sell short April $195 call, currently $1.65, stop loss $183.75.
Buy long April $210 call, currently 55 cents, no stop loss.
Net credit $1.10.


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.

Update 2/7:

RHT - Red Hat Inc (Mar Short Put)

Shares collapsed with the market to stop us out. I am going to reload this using the $115 put.

Closed Mar $120 short put, entry $1.65, exit $1.85, -.20 loss.


RHT - Red Hat Inc (Mar Short Put 2/7)

We were stopped out of the $120 short put last week andI am going to reload it with the $115 put. RHT declineed but just enough to hit our stop. The stock has good relative strength and with a farther OTM put we can lower the stop loss.

Earnings March 26th.

Sell short Mar $115 put, currently $1.16, stop loss $122.25.


SWKS - Skyworks Solutions (April Short Put 2/15)

Skyworks put in a solid bottom at $95 over the last two months and despite the market weakness the stock has been moving higher. Even the recent rumors over Apple cutting Q1 orders for the iPhone X had no impact.

Earnings May 7th.

Sell short April $95 put, currently $1.15, stop loss $102.


URI - United Rentals (April Call Spread, Short Put 2/21)

United fell $25 in the market crash and has a long way to go to recover the old highs and this spread is well out of the money. The stock is also strong enough to avoid new lows unless the bottom falls out of the market.

Earnings April 26th.

Sell short April $195 call, currently $2.25, stop loss $181.
Buy long April $210 call, currently 85 cents, no stop loss.
Net credit $1.40.

Sell short April $145 put, currently $2.00, stop loss $158.50.


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.

Update 1/31:

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.


WDC - Western Digital (April Short Put 2/21)

Western fell sharply in the market crash to support at $78 and then rebounded back over $85. The outlook is good for WDC despite the fight over the Toshiba memory. They came out of that battle with a win, just not the one they wanted.

Earnings April 25th.

sell short Apr $75 put, currently $1.09, stop loss $81.25.


WYNN - Wynn Resorts (Mar Short Put, Put Spread 1/31)

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.

Update 2/14: Easy come, easy go. Wynn shares spiked to $180 on the news Steve Wynn had resigned. Two days later Morgan Stanley downgraded the stock saying without Steve Wynn at the helm there could am impact to operations and growth as well as activist pressures. Lawsuits are springing up almost daily against the casino for allowing a sexual predator to run free. Shares crashed back to $160 to stop us out of both short put positions.

Closed 2/8: Mar $140 short put, entry $2.06, exit .91, +$1.15 gain.
Retain Mar $125 long put, entry .54, currently .21, no stop loss.

Closed 2/9: Mar $155 short put, entry $2.01, exit $5.60, -$3.59 loss.


WYNN - Wynn Resorts (Mar Short Put 2/7)

Steve Wynn resigned as CEO and Chairman because of the sexual harassment allegations that tanked the stock price. The rebound put the shares well over support at $160 and they should remain at this level or move higher.

Earnings April 23rd.

Sell short Mar $155 put, currently $2.07, stop loss $161.50.


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.