Wednesday, May 02, 2018  10:29:59 PM

Back in Correction Again

by Jim Brown

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Review prior updates here: 2014  2015  2016  2017  2018 
The Dow traded in a 300-point range on Wednesday and gave up its intraday gains to lose -174 points and close in correction territory again. The 10% correction level is 23,954 and the Dow closed at 23,924. The Dow and S&P are in bearish descending triangles, which tend to end in a downside breakdown. A break below the 200-day and the horizontal support around 23,625 would be a recipe for disaster.

A breakdown would immediately target a bear market drop of 20% in the eyes of investors and there could be some panic selling. There is no guarantee of an impending drop and buyers could appear at any time once they think the worst is over. Unfortunately there is no near term support below that 23,625 level.


The S&P chart is not as bad as the Dow and the 10% correction level is still 50 points lower. That level was strong support back in late March and early April. However, there is no such thing as a triple bottom. Triple anything, top or bottom, tends to end with a breakout or breakdown. We need the S&P to hold at the 200-day average. That is the true psychological support and portfolio managers WILL turn bearish if that level breaks.


The Nasdaq is stronger than the Dow or S&P but not by much. The 7,100 level has become the battleground and is currently the price magnet. The 100-day and the downtrend resistance line are nearly equal at 7,161 and that will be the true test. The Nasdaq resisted declining during the day because of the gains in Apple but the selling in the Dow at the close poisoned market sentiment. The Nasdaq is well over its second 10% correction level at 6,829.


I am worried the Dow is going to fail and drag the rest of the market lower. However, there are pockets of strong stocks that are ignoring the weak indexes. This will not last forever. If the Dow recovers over the next couple of days, there is the potential for another uptick. However, the farther we get into the earnings cycle the stronger the post earnings depression will become.

I would strongly advise readers to be careful with any positions you initiate and absolutely maintain tight stop losses. If the Dow breaks, the resulting selling could be very strong.

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


PAYC - Paycom (Put spread)

We closed the remaining long put at the open on Thursday.

Closed May $90 long put, entry 1.04, exit .30, -.74 loss.
Previously stopped: May $100 short put, entry $2.34, exit $1.65, +.69 gain.
Net loss 5 cents.



JACK - Jack in the Box (Short Put)

We were stopped on the short put when JACK dipped to $87.75.

Closed 5/2: May $80 short put, entry $1.20, exit .70, +.50 gain.



IPGP - IPG Photonics (Put Spread)

We closed the remaining long put for a gain at the open last Thursday. The stock had crashed the prior week to inflate our premium.

Closed 4/26: May $195 long put, entry $1.93, exit $2.75, +.82 gain.
Previously closed: May $210 short put, entry $3.43, exit $4.00, -.57 loss.
Net gain 25 cents.



New Recommendations


DQ - DAQO New Energy (June Short Put)

DQ has been trading sideways since they dropped in early April on a secondary offering announcement. There is a minor upside bias and it could be getting ready to move higher. The low volatility in DQ will let us use a tight stop and the premium is decent with a low margin requirement.

Earnings May 30th.

Sell short June $45 put, currently $1.60, stop loss $50.50.



LULU - Lululemon (June Short Put)

LULU is on fire. The stock spiked in early April and just keeps climbing a little bit every day. With this kind of relative strength we can use a tight stop loss. You know there are investors just waiting for a dip so they can buy this stock. I have wanted an entry point to go long in OIN for the last two weeks but it never worked out.

Earnings June 27th.

Sell short June $90 put, currently $1.75, stop loss $96.50.



PANW - Palo Alto Networks (June Short Put)

PANW closed at a new high on Wednesday in an ugly market. The stock has been creeping up slowly over the last several weeks despite the market volatility. This shows good relative strength.

Earnings May 28th.

Sell short June $175 put, currently $2.99, stop loss $189.50.



RH - Restoration Hardware (June Short Put)

RH gave some strong guidance when they announced earnings on the 27th. Shares have rocketed higher and appear to be headed for a retest of the highs at $105.

Earnings June 27th.

Sell short June $85 Put, currently $2.75, stop loss $92.50.



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. June expiration is the 15th.

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.

Update 4/25: 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.


ADBE - Adobe Systems (May Short Put 4/25)

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.


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.

Update 4/25:

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.


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.


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.

Update 4/25:

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.


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.

Update 4/25:

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.


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.


NFLX - Netflix (May Short Put 4/25)

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.


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.

Update 4/25:

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.


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.

Update 4/25:

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.


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.


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.

Update 4/17: Weak market knocked us out.

Closed May $95 long put, entry .53, exit .20, -.33 loss.
Previously closed: May $110 short put, entry $2.43, exit $3.40, -.97 loss.


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.


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.