Friday, June 22, 2018  3:17:40 AM

Volatility Returned

by Jim Brown

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Review prior updates here: 2014  2015  2016  2017  2018 
The market has returned to the pattern from earlier in the year with daily triple digit swings.

The tariff headlines continue to move the market and we saw a 429 point Dow drop on Tuesday and a 196-point drop on Thursday. This was the 8th consecutive Dow decline as a result of the tariff issues.

Unfortunately, they do not seem to be getting better. The rhetoric is becoming increasingly hostile and threatening and nobody is making concessions. China has less ammo for retaliation and could actually be hurt by the change in trade.

The economic forecasts are starting to fade on the trade worries. Corporations are holding off on capex spending and putting a freeze on hiring plans. This is exactly the opposite of what the president wants and that is why I believe these trade issues will be resolved within the next two months to avoid them being a negative campaign issue in the midterm elections.

Friday is the Russell index rebalance and volume should be over 10 billion shares. With this much volume the markets are likely to remain range bound. The next big move is likely to come next week.

The Dow is now well below 25,000 and 24,700 and the next material support is the 200-day at 24,253. The Dow is as oversold as the Nasdaq/Russell indexes were overbought. We should be nearing a point where the two forces equalize and the Dow turns positive while the techs and small caps remain negative. That would require a positive tariff headline.


The Nasdaq rally came to a dead stop at 7,800 for the last two days. This round number resistance after a strong two-week rally, was begging to be sold. All the big cap techs were negative for the day.


The S&P has tested support at 2,750 on two of the last three days. This is a critical level and we could see 2,700 again if it breaks. The chart has turned bearish but there is one last hope for redemption. The bank stress tests after the close on Thursday ahs turned the futures positive. However, we saw the Dow spike over 100 points at the open on Thursday before crashing back to a lower low.


The broader market has turned negative. I looked at more than 450 charts and the number of positive charts were probably less than 20. Quite a few had multiple day declines. This negative breadth was being hidden by the strong performance of the big cap techs and a few stocks in the Russell 2000. When thoswe rolled over today, the prior weakness became apparent.

I would be very cautious entering new positions until the trade issues are resolved to the market's satisfaction.

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


June Position Recap


We had a decent June expiration cycle. The first couple weeks of June were directional with a bullish bias and our short puts worked well. We had several early stops for minor losses but the winners made up for them. We were forced to close COST early when they changed the earnings date. WYNN was volatile around some board events to knock us out of that put. Overall, it was a satisfactory month and we have a good start on July.




Current Position Changes


RH - RH Inc (Short Put)

RH blew away earnings and shares spiked $30 and our short put expired worthless. Normally I would not hold over earnings but our $85 put was already $45 OTM.

Closed June $85 Short Put, entry $3.28, expired, +3.28 gain.



CP - Canadian Pacific (Short Put)

Shares fell with the market on Tuesday morning to stop us out.

Closed July $175 short put, entry $1.40, exit $1.20, +.20 gain.



NVDA - Nvidia (Short Puts)

We had two Nvidia put positions and the stock crashed with the market on Tuesday to stop us out of both. Nothing stock related. Just a 400 point drop on tariff headlines.

Closed July $225 short put, entry $2.49, exit .63, +$1.86 gain.

Closed July $240 short put, entry $2.81, exit $1.88, +.93 gain.



MCK - McKesson (Short Put)

McKesson spiked the prior week and I raised the stop. Shares immediately rolled over and knocked us out for minor gain.

Closed Jul $135 short put, entry $1.08, exit .85, +.23 gain.



New Recommendations


AAP - Advance Auto Parts (Aug Put Spread)

AAP has a chart to die for. Since earnings in May there has been a nice slow steady gain after gain and no real volatility with the market. The stock posted a gain on Thursday when all the major indexes were down hard.

Earnings August 21st.

Sell short Aug $125 put, currently $2.15, stop loss $131.85.
Buy long Aug $115 put, currently .95, no stop loss.
Net credit $1.20.



NFLX - Netflix (Aug Short Put)

Netflix is the gift that keeps on giving. The stock never quits with new high after new high. The media company acquisition binge currently in progress is mostly due to Netflix. Broadcast and cable companies are trying to get into the streaming segment to keep Netflix from taking their customers.

Earnings July 16th.

Sell short Aug $330 put, currently $4.50, stop loss $383.75.



TSLA - Tesla Inc (Aug Short Put)

Tesla has been on a roll and Elon Musk has promised the mother of all short squeezes at the end of June when they hit their production goals and turn cash flow positive. Let's hope he is right. This put is $100 OTM.

Sell short Aug $250 put, currently $4.75, stop loss $312.50.



New Covered Call Recommendations


No New Covered Calls

With the market still undecided about direction and suffering major intraday swings, I am still very cautious on covered calls. I am not recommending covered calls 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.

July expiration is the 20th. August is the 17th.

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.




Couch Potato Portfolio.



New Couch Potato Recommendations.

No new Couch Potato plays this week. The tech sector is overbought along with the Russell and both followed the Dow lower on Thursday. The Dow industrials have declined for 8 consecutive days and the chart is bearish. The VIX has rebounded to 15 and added nearly 2 points today. There are no "safe" delta neutral plays or at least none that I could find. We need for the tariff headlines to turn positive so investors will go dormant for the rest of the summer.

All of our positions expired last Friday.


Couch Potato Play Updates

No active positions.


Existing Option Writer 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.

Update 6/7: Arista was looking weak last Wednesday and I recommended we close the position while it was still positive. It turned out not to be a problem and the stock rocketed higher.

Closed July $230 short put, entry $3.78, exit $3.00, +.78 gain.


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.

Update 6/7: Costco changed their earnings date and we had to exit the spread early last week to avoid their earnings.

Closed Jun $190 short put, entry $1.81, exit $1.20, +.61 gain.
Closed Jun $180 Put, entry .64, exit .33, -.31 loss.
Net gain 30 cents.


CP - Canadian Pacific (July Short Put 5/30)

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.


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.

Update 5/30: 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.


FB - Facebook (July Short Put 5/30)

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.


FB - Facebook (July Short Put 6/14)

Facebook has shaken off all the volatility from the privacy scandals and closed at a new high on Thursday. The stock could continue higher for the short term on the higher high creates another higher hand syndrome.

Earnings July 25th.

Sell short July $185 Put, currently $1.35, stop loss $191.


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.

Update 6/14: The potential nuclear disarmament deal with North Korea caused all defense stocks to decline and we were stopped out of the short put and the short put side of the spread.

Closed July $190 short put, entry 1.35, exit 1.96, -.61 loss.

Closed July $185 short put, entry $2.20, exit $1.15, +$1.05 gain.
Retain July $175 long put, entry .95, currently .25.


LLL - L3 Technologies (July Short Put 6/7)

The May dip is being quickly erased and the pauses for profit taking have been minor. There is no fundamental reason for the rebound to fail.

Earnings July 31st.

Sell short July $190 put, currently $1.20, stop loss $197.


LRCX - Lam Research (July Call Spread 6/14)

Lam disappointed on earnings and fell from $200 to $181. Support broke today and it could have a lot further to go.

Earnings July 26th.

Sell short July $200 call, currently $1.65, stop loss $159.
Buy long July $210 call, currently .65, no stop loss.
Net credit = $1.00.


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.

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

Update 6/14: LULU had exploded higher and I recommended closing both short puts on Friday. Both were profitable.

Closed June $90 short put, entry $1.78, exit .01, +$1.77 gain.

Closed June $92.50 short put, entry $1.59, exit .03, +$1.56 gain.


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.


MCK - McKesson (July Short Put 6/7)

McKesson is rebounding from a higher low from the March bottom. Shares are recovering slowly.

Earnings August 21st.

Sell short July $135 put, currently $1.05, stop loss $141.00.


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.

Update 6/7: We closed the short put at the open on Thursday to end a profitable position.

Closed June $300 short put, entry $3.40, exit .23, +$3.17 gain.


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.


NVDA - Nvidia (July Short Put 5/30)

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.


NVDA - Nvidia (July Short Put 6/7)

Nvidia has broken above resistance and closed at a new high on Wednesday. There was a minor decline with the Nasdaq on Thursday The most recent analyst was targeting $400 for the stock in a year.

Earnings August 9th.

Sell short July $240 put, currently $2.30, stop loss $254.50.


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.


SHOP - Shopify (July Put Spread 6/14)

Shopify had decent earnings but still consolidated the last week. Thursday's gain closed at a new high. Stocks that make new highs tend to continue making new high.

Earnings August 1st.

Sell short July $150 put, currently $2.15, stop loss, $158.75.
Buy long July $140 put, currently $1.15, no stop loss.
Net credit $1.00.


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.

Update 5/30: 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.


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.