Thursday, April 26, 2018  12:59:18 AM

Ugly Market

by Jim Brown

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Review prior updates here: 2014  2015  2016  2017  2018 
The major indexes may not be in correction mode but the broader market is crashing.

If you look at the internals with the A/D line at 4:3 in favor of decliners, it does not appear to be a severe decline. However, it you look at the individual charts it is an ugly market. The only stock group showing an imbalance to the positive side is the small caps and then only by the slimmest of margins.

The big cap tech stocks are in correction led by the FAANG stocks. The chip sector is in a correction thanks to multiple downgrades and the massacre in Apple.

I have been doing this a very long time and I cannot remember a week in the last several years when all the individual stock charts were this ugly. While there may have been some positive gainers today, the longer-term trend is still down.

There was almost nothing to play. You do not want to short puts in a declining market and call premiums have evaporated to nothing because everyone expects the market to continue moving lower.

We are also in that changeover week where all the front month options on stocks with a lot of volume have gone to $1 strikes or even 50 cents between the strikes. That kills the premiums for any stroke more than $5 OTM.

With the market acting so crazy, I could not bring myself to pull the trigger and move to June strikes. That is an eternity in market time in a market that is correcting. Next week we will have to shift to June strikes because the May premiums will be microscopic.

The broader market is in decline mode. The odds are very good the S&P is going to retest the 10% correction level at 2,586. This will be the third test and conventional wisdom believes there is no such thing as tripled bottoms or tops. The third time is the charm for breakouts and breakdowns.


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I continue to recommend that traders remain in cash as much as possible. There is probably a buying opportunity in our future but this may not be it. Until the markets can form an uptrend and then sustain it, we do not want to be in the market. Let somebody else catch the falling knives and then cuss himself or herself a couple days later as a new bottom emerges. Be patient, there is always another day to trade.

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


April Position Recap


April was a rough month with 500-700 point intraday swings the norm rather than the exception. I actually feel fortunate we escaped the month without an even larger loss. The gap down stop in Netflix was our biggest loss and accounted for half of the month's decline.




Current Position Changes


ADBE - Adobe Systems (Short Put)

We were finally stopped out of the Adobe put thanks to a tight stop. This was a textbook example of how a play is supposed to work.

Closed May $180 short put, entry $1.81, exit .16, +$1.65 gain.



DPZ - Dominos Pizza (Short Put)

Dominos did not post a material decline given its recent gains but it was enough to take us out of the position before a potential support break at $230.

Closed May $210 short put, entry $3.16, exit $2.10, +$1.06 gain.



LLL - L3 Technologies (Short Put)

L3 crashed nearly $18 but fortunately we had a tight stop loss and we escaped with a minor gain.

Closed May $190 short put, entry $1.55, exit .85, +.70 gain.



PAYC - Paycom (Put Spread)

Paycom set new highs last week but the market weakness finally took hold and dragged the stock back to support at $110. If I had any confidence at all that the market was going to rebound I would resell that May $100 put, currently $1.50 but the indexes are too weak to risk more money on this position. Given the recent gains it would be a prime target for selling if the market continues lower.

Closed May $100 short put, entry $2.34, exit 1.65, +.69 gain.
Close May $90 long put, entry $1.04, currently .50, -.54 loss.



IPGP - IPG Photonics (Put Spread)

The rebound from uptrend support failed and then support failed. We were stopped on the short side a $226.50. The long put is currently profitable so I am recommending we close it as well. Normally, I would just put a stop loss on it but this is a May position and the $195 put is still $20 OTM. By next week that premium will begin to evaporate quickly.

Closed May $210 short put, entry $3.43, exit $4.00, -.57 loss.
Close May $195 long put, entry $1.93, currently $2.84, +.91 gain.



SHOP - Shopify (Short Put)

No magic here. The weak market killed the rebound and stopped us out.

Closed May $110 short put, entry $2.20, exit $3.31, -1.11 loss.



New Recommendations


ADBE - Adobe Systems (May Short Put)

Adobe is a strong chart with an uptrend that has not been violated in the last year. Support should be firm at $215.

Earnings June 13th.

Sell short May $205 put, currently $2.45, stop loss $212.25.



NFLX - Netflix (May Short Put)

Netflix spiked to a new high after earnings then fell back as the weak market took its toll. Shares closed $13 off their intraday low today. This could be an attempt to put in a bottom at $300.

Earnings May 31st.

Sell short May $270 put, currently $2.67, stop loss $289.



New Covered Call Recommendations


No New Covered Calls

The current increased market volatility makes covered calls dangerous at this time. There are lots of suggestions on the additional play list.


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.

May expiration is the 18th.

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.


ADBE - Adobe (May Short Put 3/28)

Adobe spiked to $230 on earnings and held there for several days. The big rebound from Monday saw Adobe make a new high but the market decline has taken its toll. I am a firm believer in Adobe and I think it will hold most of its gains.

Earnings June 13th.

Sell short May $180 put, currently $2.09, stop loss $201.50.


DPZ - Domino's Pizza (May Short Put 3/28)

Domino's is continuing its post earnings run and despite the ugly market over the last several days, the stock closed at a new high.

Earnings May 28th.

Sell short May $210 Put, currently $3.30, stop loss $223.50.


DQ - DAQO New Energy Corp (May Short Put 4/4)

Throughout the market decline DAQO has held support at $45. Shares have risen recently to close over $54 on Wednesday. This is not a high premium put but it is worth the effort.

Earnings May 20th.

Sell short May $40 put, currently $1.20, stop loss $47.85.

Update 4/18: DQ announced a secondary offering on the 12th and dropped $6 on the news to stop us out.

Closed 4/12: May $40 short put, entry $1.15, exit $1.30, -.15 loss.


HD - Home Depot (Apr Put Spread 2/28)

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.

Update 3/7:

HD - Home Depot (Put Spread)

With the Dow bleeding points daily for the last week, it is no surprise that Home Depot shares declined. We were stopped on the initial rash on March 1st.

Closed Apr $170 short put, entry $2.52, exit $3.10, -.58 loss.
Retain Apr $160 long put, entry .98, currently .93.

Update 4/4: The remaining long put was stopped at $177.65 in an effort to retain some of the premium.

Closed Apr $160 long put, entry .98, exit .40, -.58 loss.
Previously closed Apr $170 put, entry $2.52, exit $3.10, -.58 loss.
Net loss $1.16.


IPGP - IPG Photonics (May Put Spread 4/18)

IPGP bottomed at $220 on the last decline in early April. The stock is not roaring higher but it is moving steadily. There has been very little volatility over the last two weeks.

Earnings May 17th.

Sell short May $210 put, currently $2.35, stop loss $226.50.
Buy long May $195 put, currently $1.10, no stop loss.
Net credit $1.25.


JACK - Jack in the Box (May Short Put 4/11)

JACK appears to have found support at $83-$84 and has been moving slightly higher despite the big market swings. The base at support appears solid.

Earnings May 23rd.

Sell short May $80 put, currently $1.15, initial stop loss $83.75.


LLL - L3 Technologies (May Short Put 4/4)

During the market weakness L3 held in the 200-205 range and broke out to a four-week high close on Wednesday. With even a barely positive market, the defense stocks should do well given the $700 billion in funding that was recently approved. This is a short fuse with earnings three-weeks away.

Earnings April 26th.

Sell short May $190 Put, currently $1.55, stop loss $203.50.


LRCX - Lam Research (May Short Put 4/4)

Lam Research is capable of making some big directional moves. After trading relatively flat at $195 for five days the stock posted a decent gain on Wednesday. I believe that $195 level is going to be decent support. This is a short fuse with only three weeks until earnings.

Earnings April 26th.

Sell short May $170 put, currently $2.70, stop loss $190.25.

Update 4/11: We were only in the LRCX position one day before the tariff battle out of China appeared to suggest there would be tariffs on chips and the entire sector collapsed. We were stopped for a large loss. There is no way we could have known this headline would appear.

Closed May $170 short put, entry $2.62, exit $4.10, -1.48 loss.


MCK - McKesson (May Short Put 4/11)

McKesson has been moving steadily sideways with a minimal upward bias over the last three weeks in a very bad market. Support has held at $140.

Earnings May 3rd.

Sell short May $135 put, currently $2.15, stop loss $138.75.


MLM - Martin Marietta Materials (Apr Put Spread 3/14)

The company posted strong earnings and guidance in February and spiked to $240. With the market correction and tariff worries, shares have fallen back to very strong support at $205. This should hold unless the market goes back into meltdown mode.

Expected earnings May 15th.

Sell short April $190 put, currently $1.75, stop loss $199.85.
Buy long April $180 put, currently .95, no stop loss.
Net credit .80 cents.

Update 4/11: We closed the long put at the open on Thursday.

Closed Apr $180 long put, entry .80, exit .28, -.52 loss.
Previously closed: Apr $190 short put, entry $1.80, exit $2.45, -.65 loss.
Net loss -1.17.


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.

Update 3/21: The short put was stopped out on the gap lower on the 19th for a successful position.

Closed Apr $210 short put, entry $3.24, exit .25, +$2.99 gain.


NFLX - Netflix (April Short Put 3/7)

Netflix continues to make new highs and have been immune to most of the market declines. We already have one April short put but as long as the stock keeps making new highs there is no reason not to add another one.

Earnings April 23rd.

Sell short April $250 put, currently $1.89, stop loss $282.50.


NFLX - Netflix (April Short Put 3/23)

Netflix is the gift that keeps on giving. With sky high premium well out of the money it is very hard not to play them every week.

Earnings April 23rd.

Sell short Apr $270 put, currently $3.05, initial stop loss $298.50.


NVDA - Nvidia (April Put Spread 2/28)

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.

Update 3/7:

NVDA - Nvidia (Put Spread)

Nvidia crashed $26 with the semiconductor sector and the market and knocked us out of the put spread. No news, just an ugly market on tariff headlines.

Closed Apr $205 short put, entry $2.25, exit $5.00, -$2.75 gain.
Retain Apr $190 long put, entry $1.00, currently $1.00. No stop loss.

Update 4/4: Nvidia shares bounced to hit our stop loss of $225 on the remaining long put. We were hammered on the initial position when the market imploded and stopped us out of the short side. We recovered a little on the long put but it was not much.

Closed Apr $190 long put, entry $1.00, exit $1.82, +.82 gain.
Previously closed Apr $205 short put, entry $2.25, exit $5.00, -2.75 loss.
Net loss $1.93.


PAYC - Paycom Software (May Put Spread 4/11)

Paycom shares are holding at a new high with good relative strength over the last week.

Earnings May 8th.

Sell short May $100 put, currently $1.90, stop loss $106.35.
Buy long May $90 put, currently .80, no stop loss.
Net credit $1.10.


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.

Update 3/21: Huge rebound in PXD today of $5.51 on surge in crude prices. We were stopped out for a decent gain.

Closed April $195 short call, entry $2.20, exit .50, +$1.70 gain.


SHOP - Shopify (April Short Put 2/28

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.


SHOP - Shopify (April Short Put 3/14)

Shopify crushed earnings estimates and soared to new highs. The market weakness barely produced any drag but it does exist. With a positive market Shopify should move higher.

Earnings May 17th.

Sell short April $130 put, currently $1.85, stop loss $140.65.


SHOP - Shopify (May Short Put 4/18)

Shopify crashed after earnings to decline from $155 to $115 in just over week. That was really painful. Shares have started to to rebound out of their consolidation pattern.

Earnings May 17th.

Sell short May $110 put, currently $2.05, stop loss $119.


STMP - Stamps.com (May Short Put 4/18)

Stamps.com closed at a 6-month high on Wednesday. This stock is prone to volatility and wild moves around earnings. We will exit before that happens.

Earnings May 23rd.

Sell short May $180 put, currently $2.30, stop loss $208.65.


STZ - Constellation Brands (April Put Spread 3/14)

Constellation was making new highs just three days ago but the market decline pulled it back under that prior high resistance. It should return to the higher levels once the market recovers.

Expected earnings April 4th. (prior to expiration)

Sell short April $210 put, currently $2.60, stop loss $220.85.
Buy long April $200 put, currently $1.60, no stop loss.
Net credit $1.00.

Update 4/11: We closed the left over long put at the open on Thursday.

Closed Apr $200 long put, entry $1.50, exit .07, -1.43 loss.
Previously Closed: Apr $210 short put, entry $3.00, exit $3.50, -.50 loss.
Net loss $1.93.


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.

Update 3/21: The trend changed in Skyworks when the Nasdaq rolled over and Apple cut its orders for iPhone components. We were stopped for a minor gain.

Closed April $95 short put, entry $1.15, exit .35, +.80 gain.


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.

Update 2/28: 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.

Update 3/7:

URI - United Rentals (Call Spread)

We were stopped out the prior week when the market spiked higher and we were stopped on the short call again this week when URI ignored the ugly market to move higher. If URI keeps climbing maybe we can get some of our money back on the long call.

Closed Apr $200 short call, entry $1.90, exit $3.20, -1.30 loss.
Retain Apr $210 long call, entry .85, currently .68, no stop loss.


VMW - VM Ware (April Short Put 3/14)

Shares of VMW have been beaten like a rented mule over the last two months after Dell talked about doing a reverse merger into the 20% of VMW stock they do not own. The stock dipped on both series of headlines but has since recovered. The Dell news is now factored into the stock unless they come out with some new plan.

Earnings May 31st.

Sell short April $110 put, currently $1.00, stop loss $119.50.

Update 4/18: VMW rose intraday last Thursday to hit out stop loss at $122.50 on the remaining long put. Shares exploded higher on Monday on news Carl Icahn had taken a position.

Closed 4/12: Long May $95 put, entry .53, exit .20, -.33 loss.
Previously closed: Short May $110 put, entry $2.43, exit $3.40, -.97 loss.
Net loss $1.30.


VMW - VMWare (May Put Spread 3/23)

We already have a short put on VMW but the excellent relative strength in the fave of a weak Nasdaq suggests we can add another position without too much risk.

Earnings May 31st.

Sell short May $110 put, currently $2.10, initial stop loss $119.85.
Buy long May $95 put, currently .50, no stop loss.
Net credit $1.60.


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.

Update 3/21: We closed the short put on WDC at the open last Thursday.

Closed Apr $75 short put, entry $1.02, exit .07, +.95 gain.


WIX - WIX.com Ltd (May Put Spread 3/23)

WIX is a website hosting company that allows users to create fully functional websites in only a few clicks and drag and drop some images. They have been very successful and the stock has gone vertical since Q4 earnings.

Earnings May 15th.

Sell short May $75 put, currently $1.90, stop loss $81.
Buy long May $65 put, currently .70, no stop loss.
Net credit $1.20.

Update 4/11: We closed the leftover long put at the open on Thursday.

Closed May 65 long put, entry .74, exit .90, +.16 gain.
Previously closed: May 75 short put, entry $2.22, exit $3.80, -1.58 loss.
Net loss $1.42.


WIX.com Ltd (May Short Put 3/23)

WIX is a website hosting company that allows users to create fully functional websites in only a few clicks and drag and drop some images. They have been very successful and the stock has gone vertical since Q4 earnings.

Earnings May 15th.

Sell short May $75 put, currently $1.90, stop loss $81.00.


WYNN - Wynn Resorts (Apr Short Put 3/7)

We already have two profitable positions on WYNN but there is nothing stopping us from opening another. The stock is recovering from the headline now that Steve Wynn is out of the company. They are considering a name change to lose the stigma. Support is holding at $161.

Earnings Apr 23rd.

Sell short April $150 put, currently $1.84, stop loss $158.50.


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.