Thursday, May 31, 2018  3:31:16 AM

Tariff Thursday

by Jim Brown

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Review prior updates here: 2014  2015  2016  2017  2018  2019 
The White House is expected to announce an end to tariff exemptions on steel and aluminum for the EU on Thursday.

There is never a dull moment where headlines are not flowing out of Washington or some other hot spot around the world. China is reportedly lining up other countries as allies against the U.S. and the proposed tariffs. If they are successful it could force a showdown with President Trump and it may not be pretty.

The markets rebounded today but did not recover Tuesday's loss on the Dow and S&P. The Nasdaq and Russell had a good day.

The S&P rebounded right back into that sideways congestive consolidation and that is where it closed. Once back to resistance the rebound stalled. I continue to recommend waiting for a break over 2,750 before adding a bunch of longs. If you are a trader then Tuesday's decline was a gift on the long side. Oh my gosh, Italy and Spain are going to leave the euro, their governments are in a shambles, their bonds are crashing. Kings X, just kidding. Everything is ok and Itally even sold new debt on Wednesday with their 10-year yields at 2.96% and just 12 basis points higher than the U.S. ten-year treasury. Which one do you think has the most risk? Conspiracy theorists believe the ECB probably bought a large chunk of that debt to ensure the auction was favorable. The entire crash was just a knee jerk reaction and cooler heads have prevailed.

It was a great rebound on the Dow but only recovered 78% of Tuesday's loss. The index failed to move back above prior resistance at 24,700 and despite the big green candle, it is still a lower high until proven otherwise. The tariff news after the bell pushed the futures lower but they have recovered and the Dow futures are only down -20 points and S&P -3 points. There are still risks with China reportedly lining up allies in their expected fight against U.S. trade tariffs. If they can create a strong coalition against the U.S., it will cause even more trouble in the months ahead. The Dow will suffer if that happens.

The Nasdaq had a pretty good day. The index did not decline as much at the close on Tuesday so the 66-point rebound catapulted it well over the strong resistance at 7,425. The index is now approaching new high territory if it can move past 7,600. Apple was a drag after a downgrade from the Maxim Group to hold.

The Russell is going to be the Pied Piper for the market. With the strong breakout today and the Nasdaq well over 7,425, these two indexes could lead the entire market higher.

Call premiums have risen sharply but only for the first couple of strikes. Those strikes far enough OTM for safety have minimal premium. Apparently, investors are not expecting a continued rally.

I am still not comfortable recommending covered calls even though the small cap stocks are doing well. The market is too unstable and there are too many daily headlines.

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

VMW - VMWare (Put Spread)

We closed the left over put at the open last Thursday.

Closed June $115 long put, entry .75, exit .62, -.13 loss.
Previously closed June $125 short put, entry $1.70, exit $2.25, -.55 loss.

DQ - DAQO New Energy (Short Put)

We closed the short put at the open last Thursday. Dang good thing with the $8 decline today.

Closed June $45 short put, entry 1.65, exit .20, +1.45 gain.

New Recommendations

CP - Canadian Pacific (July Short Put)

Shares broke out to a new high on Wednesday and the momentum appears to be increasing.

Earnings July 17th.

Sell short July $175 put, currently $1.30, stop loss $184.50.

FB - Facebook (July Short Put)

Facebook closed at a 4-month high as all the privacy issues appear to be in the rear view mirror. With the Nasdaq nearing a new high the FAANG stocks should do well.

Earnings July 25th.

Sell short July $175 put, currently $1.63, stop loss $183.65.

NVDA - Nvidia (July Short Put)

Nvidia has not lost its mojo. The stock seased over resistance on Wednesday and could be making a ne whigh soon if the Nasdaq continued to remain positive.

Earnings August 9th.

Sell short July $225 put, currently $2.27, stop loss $243.85.

New Covered Call Recommendations

No New Covered Calls

With the market undecided about direction and suffering major intraday swings, I am still very cautious on covered calls. I did not find anything I would put my money in again this week.

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.

June expiration is the 15th. July 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.

ANET - Arista Networks (July Short Put 5/23)

Arista Networks is a solid competitor to Cisco Systems. Analysts believe Cisco's weak performance in the Q1 earnings was due in part to the surge in acceptance of Arista's products. The huperscale cloud companies like Facebook, Microsoft, etc are buying millions of dollars of high performance switches from companies like Arista rather than pay for the top of the line Cisco equipment. In this business performance and price both matter.

Earnings Aug 3rd.

Sell short July $230 Put, currently $3.40, stop loss $246.25.

COST - Costco (June Put Spread 5/16)

Costco surged to a new high on Wednesday after Raymond James said very nice things about the new Costco store in France. Costco is Amazon proof!

Earnings June 6th.

Sell short June $190 put, currently $1.87, stop loss $194.65.
Buy long June $180 put, currently .74, no stop loss.
Net credit $1.13.

DQ - DAQO New Energy (June Short Put 5/2)

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.

LLL - L3 Technologies (July Put Spread 5/23)

The defense company suffered a massive drop from $216 to $180 the week before earnings and there was no company specific news. Shares are rebounding and should cross resistance at $197.50 in the coming days. Once back over $200 it should attract some of the old money that was knocked out on the dip.

Earnings Aug 1st.

Sell short July $185 put, currently $2.15, stop loss $192.50.
Buy long July $175 put, currently $1.05, no stop loss.
Net credit $1.10.

LULU - Lululemon (June Short Put 5/2)

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.

Update 5/9: LULU shares collapsed after a news headline about a girl getting second degree burns wearing yoga apparel for a MRI. However, although that headline was new the news was not. MRI facilities all over the country have signs and warnings posted about NOT wearing yoga apparel during a MRI. The lycra and spandex for sports have tiny metal threads that inhibit bacteria growth and body odor. Unfortunately, those threads heat up in the MRI. It is like sticking aluminum foil in a microwave.

The shares recovered immediately and I am recommending we reload the position.

Closed June $90 short put, entry $2.18, exit $2.75, -.57 loss.

Sell short June $90 put, currently $1.80, stop loss $96.45.

LULU - Lululemon Athletica (June Short Put 5/16)

LULU is in rebound mode after the big stumble on May 4th that stopped us out of the last position. The company made a new high on the Macy's earnings.

Earnings June 27th.

Sell short June $92.50 put, currently $1.56, stop loss $98.50.

NFLX - Netflix (June Short Put 5/9)

We already have a short put on Netflix but with premiums so high, it is tough to pass up.

Earnings July 16th.

Sell short June $300 put, currently $3.50, stop loss $318.65.

NFLX - Netflix (July Short Put 5/23)

Netflix is back! After posting monster earnings and subscriber growth, the shares spiked then faded in a bout of post earnings depression. That is over and Netflix soared $13 to a new high on Wednesday. That leaves very strong support at $325.

Earnings July 16th.

Sell short July $300 put, currently $5.20, stop loss $325.75.

PANW - Palo Alto Networks (June Short Put 5/2)

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.

PANW - Palo Alto Networks (June Short Put 5/9)

Shares are exploding higher in a positive market. They should rest soon but there is plenty of room between the current price and our put strike.

We already have a position in PANW. If you do not want to double up on the singl estock risk, please pick another play.

Earnings May 28th.

Sell short June $185 put, currently $3.00, stop loss $197.50.

Update 5/16: We were stopped on both of our PANW puts last week. The low for the week was 197.35 and that was exactly the low on Tuesday when the market posted that huge intraday drop.

Closed June $175 Short Put, entry $2.99, exit $2.50, +.49 gain.

Closed June $185 Short Put, entry $3.40, exit $4.15, -.75 loss.

Net loss 26 cents.

RH - Restoration Hardware (June Short Put 5/2)

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.

RHT - Red Hat (July Short Put 5/23)

Red Hat had a very good run in early May and then collapsed back to $160. This level was tested as support twice and held both times. If RHT can move over $165, it could retest the highs.

Earnings June 27th.

Sell short July $150 put, currently $2.70, stop loss $159.25.

VMW - VMWare (June Put Spread 5/9)

VMWare surged to a new post January high on Wednesday after an analyst said the stock could rise another 30% to $175 in the coming weeks. The stock weathered the post Icahn position depression cycle with a $7 decline and has now erased that loss. Carl acquired just under a 5% stake and is likely to resist a reverse merger with Dell. Icahn has battled with Michael Dell in the past and lost so it is personal for Carl and likely to be dramatic.

Earnings May 31st.

Sell short June $125 put, currently $2.35, stop loss $133.65.
Buy long June $115 put, currently $1.05, no stop loss.
Net credit $1.30.

Update 5/23: The Carl Icahn rally ended and after a week of sideways movement the stock finally triggered the stop loss at $137.00 on Monday. Since the long put is $23 OTM with only 3 weeks until expiration, I am recommending we close it.

Closed June $125 short put, entry $1.70, exit $2.25, -.55 loss.
Close June $115 long put, entry .75, currently .66, -.09 loss.

WYNN - Wynn Resorts (June Short Put 5/9)

Elaine Wynn has won the support of all three investor proxy advisory firms for her "Campaign for Change" slate of board nominations. She is trying to evict all the old board members loyal to Steve Wynn in hopes of avoiding serious problems with the probes into moral fitness by Nevada and Massachusetts. Ironically, Steve tried to prevent her from voting in years past and muted her as a stockholder. Now ISS, Eagan-Jones and Glass Lewis have all recommended investors vote with Elaine. Shares soared on the news.

Earnings July 26th.

Sell short June $180 put, currently $1.40, stop loss $189.50.

Update 5/16: Wynn shares crashed back to earth with the Nasdaq to stop us out on Tuesday. No specific news. Just a bout of profit taking in the market.

Closed June $180 short put, entry $1.39, exit $2.07, -.68 loss.

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.