Friday, August 24, 2018  3:27:12 AM

Melting Up

by Jim Brown

Click here to email Jim Brown
Review prior updates here: 2014  2015  2016  2017  2018 
Despite more negative headline than any market should be able to bear, we are only a few points from a new high.

Prosecutors are suddenly finding potential witnesses under every rock and immunity and plea deals are being announced every day. This spectacle is building up with surprising speed into what could be an ugly political event. It would take an army of lawyers to determine the president's actual exposure and I am sure there is an army working behind the scenes. We are only one headline away from what could be a catastrophic revelation. Even if we do not get that smoking gun headline, the drip, drip, drip of negative news is going to chip away at Trumps base and the fate of the mid-term elections could swing back in favor of the democrats. With the economy running at a 4% GDP pace the market would probably react negatively the tax cut, regulation cutting holiday had been cancelled.

The market has actually held up rather well. Apparently, the Teflon Don is still shedding problems like water off a duck's back. If the market believes this is changing, the direction could turn negative.

On the plus side, Fed Chairman Jerome Powell will speak at the Jackson Hole symposium Friday morning and there could be a dovish surprise. With President Trump taking aim at Powell and the Fed this week for hiking rates too fast, Powell could tone down his remarks about future hikes while still trying to remain politically independent. No government or high-ranking official wants to get into a Twitter war with the president so Powell may try to sidestep the issue and that could be seen as somewhat dovish.

We are seeing signs of some cracks in the economy, some from the tariff impacts and some from rising rates. New home sales were the lowest in nine months. Rising prices and rising rates are keeping shoppers at home.

The two most important charts are the S&P and Russell. Despite the increasingly negative headlines the S&P only lost 5 points and then Russell lost 5 as well. That is peanuts compared to what it could have been.

Both are near new highs and both are sowing decent relative strength. If they can hold their gains until the headlines blow over the market has a chance for success. I just do not know how long it is going to take for the headlines to calm, if ever.



Option premiums are very small because there is no direction. We continue to see moves in both directions halted before they ever get a good start. The market is trying to melt up with the prior highs on the Dow and S&P acting like tractor beams too pull the indexes higher. There is a good chance there could be some news on Friday but the real news day will be Monday. All the events of this week plus all the legal maneuvering should be priced into the futures before Monday's open.

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


August Position Recap


The August option cycle was choppy with several bouts of volatility with the late July dip along with crashes in Netflix and Facebook. We escaped with a gain and that is what counts. We need the market to pick a direction and hold it for a couple weeks. Would that be too much to ask?




Current Position Changes


TSLA - Tesla Inc (Sep Short Put)

There was no entry on the Tesla put on Friday. The NYT interview was released on Friday morning and the stock gapped down $15. We do not enter positions in that type of scenario. The stock was down -$30 for the day.



New Recommendations


TWLO - Twilio Inc (Oct Put Spread)

TWLO closed at a new high on Thrusday after spiking more than $10 after earnings two weeks earlier. The post earnings depression was minimal and TWLO could ne off to the races.

Earnings Nov 6th.

Sell short Oct $70 put, currently $2.19, stop loss $74.65.
Buy long Oct $60 put, currently .70, no stop loss.
Net credit $1.49



ANET - Arista Networks (Oct Short Put)

Arista has caught fire and after a series of higher lows has finally broken out to a higher high. This stock appears poised for take off.

Earnings Nov 6th.

Sell short Oct $250 put, currently $3.00, stop loss $269.25.



NVDA - Nvidia (Oct Short Put)

Nvidia disappointed some analysts with their earnings but announced a new video chip that is 600% faster than current chips. This will more than power earnings in Q3/Q4. The dip was immediately bought and we are not likely to retest that $240 level in the near future.

Earnings Nov-6th.

Sell short Oct $240 put, currently $2.82, stop loss $254.85.



STZ - Constellation Brands (Oct Short Put)

Constellation crashed on the announcement they bought a major stake in Canopy Growth, a marijuana grow company. Shares briefly fell to just below $200 before starting to rebound. That should be strong support.

Earnings Sept 28th.

Sell short Oct $190 put, currently $2.20, stop loss $198.25.



New Covered Call Recommendations


CLVS - Clovis Oncology Inc

I finally found a stock I am willing to use for a covered call. The high premium will give us a significant amount of protection if the stock suddenly declines. Support at $35 has been rock solid and shares are trying to rally.

Earnings Nov 6th.

Buy Clovis shares, currently $35.95, stop loss $33.50.
Sell short Oct $35 call, currently $4.20, stop loss $33.50.
Net debit $31.75.



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.

September expiration is the 21st, October is the 19th.

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. You should always exit a short position the day before earnings.




Couch Potato Portfolio.


No Active Plays


New Couch Potato Recommendations.

No new Couch Potato plays this week. With the market walking a cliff edge of volatility there is nothing safe from danger long enough for a neutral play.

The stocks that have reported earnings are directional either crashing or spiking. Premiums are very small more than 2 strikes from the money and that is not enough room in this market.

The tariff issues have not gone away. The headlines are daily and any time now we could wake up to a 500 point drop. Add in the growing legal problems for president Trump and the market is only one headline away from self destructing.

If we cannot find a low volatility play we should not play. The market could move in either direction on Friday as political event risk returns.


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.


AAOI - Applied Optoelectronics (Aug Short Put 7/12)

Shares have been moving steadily higher and closed at a ten-month high on Thursday. A Davidson analyst said the company was moving into a significant growth phase.

Earnings August 7th.

Sell short Aug $42.50 put, currently $2.42, stop loss $44.65.

Update 7/19: B. Riley analyst Dave Kang downgraded the outlook for AAOI if the $200 billion in proposed tariffs for the end of August were to be enacted. He said the tariff on Chinese components would price AAOI out of the market for U.S. datacenter customers. Shares fell $7 over two days.

Closed Aug $42.50 short put, entry $2.90, exit $3.80, -.90 loss.


AAP - Advance Auto Parts (Aug Put Spread 6/21)

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.

Update 7/26: No specific news. Shares declined with the market to stop us out on the 24th.

Closed Aug $135 short put, entry $2.70, exit $3.60, -.90 loss.


AAP - Advance Auto Parts (Aug Short Put 7/19)

We already have an August put spread on AAP but it is one of the few stocks that still has premiums. The stock surged to breakout on Thursday. That should be a buy signal for price chasers.

Earnings August 21st.

Sell short Aug $135 put, currently $2.50, initial stop loss $139.


AAPL - Apple Inc (Sep Short Put 8/16)

Apple spiked to $206 after earnings and has held over that level for a week despite the extreme Nasdaq volatility on Wednesday. Warren Buffett just added 12.5 million shares to bring his stake to $50 billion. With the cash repatriation, increased buybacks and dividends and the upgrade cycle starting in September, there is no reason for this stock to decline other than a market implosion.

Earnings November 6th.

Sell short Sep $200 put, currently $1.11, stop loss $205.85.


ADBE - Adobe Systems (Sep Short Put 7/26)

Adobe continues to surprise on earnings and continues to move higher. The 60-day average has been support for the last year but it is rarely touched. Tuesday's close was a new high.

Sell short September $235 put, currently $2.41, stop loss $254.85.

Update 8/2: The three-day -329 point drop on the Nasdaq Composite crushed Adobe and all the big cap tech stocks. We were stopped out for a loss.

I am going to recommend a new position on Adobe.

Closed Sept $235 short put, entry $2.40, exit $3.50, -$1.10 loss.


ADBE - Adobe Systems (Sep Short Put 8/2)

Afobe had a nice rally obliterated by the Nasdaq crash but shares are rebounding nicely. I am going to reload a short put position on this stock.

Earnings Sept 13th.

Sell short Sept $230 put, currently $2.88, stop loss $243.85.

Update 8/16: The Nasdaq crash at the open on Wednesday was brutal. The index lost -97 for the day but it was down -135 at the open. This knocked us out of ADBE for a minor gain.

Closed Sep $230 Short Put, entry $2.77, exit $2.56, +.21 gain.


COST - Costco (Sep Short Put 8/2)

Costco shares had stalled at $220 for the last two weeks but resisted declining with the Nasdaq until Tuesday of this week. That decline was met with immediate buying and the stock closed at a new high. Amazon is no threat and Kroger is no threat. Costco is taking market share away from both.

Earnings August 20th.

Sell short Sept $210 put, currently $1.76, stop loss $216.75.
Buy Sept $200, currently .74, no syop loss.


FB - Facebook (Aug Put Spread 7/5)

Facebook rebounded on Thursday from a two week decline on worries over their privacy issues. This is noise and a long way from any enforcement action and any material fine. The stock should be poised to rebound with the Nasdaq if the tariff headlines do not tank the market.

Earnings July 26th.

Sell short Aug $180 put, currently $2.29, stop loss $192.00.
Buy long Aug $170 put, currently $1.15, no stop loss.
Net credit $1.14.

Update 7/26: I neglected to remind readers to close the FB position the day before earnings as we always do. I am sure readers exited rather than held a short position over an earnings report. We always close at the open the morning before earnings. The FB collapse is a prime example of why we always close the short position before earnings.

Closed Aug $180 short put, entry $2.32, exit .42, +1.90 gain.
Closed Aug $170 long put, entry $1.11, exit .17, -.94 loss.
Net gain .96.


FFIV - F5 Networks (Aug Short Put 6/28)

F5 had a nice rally in progress until the Nasdaq crash knocked it back to support, which held very well. This could be a launch point for a continued rally. If not, then we have a clear exit signal.

Earnings July 26th.

Sell short Aug $155 put, currently $1.97, stop loss $168.85.

Update 7/19: F5 crashed at the open on Thursday on no news. The market declined sharply, especially in the tech sector. We escaped with a minor gain.

Closed Aug $155 short put, entry $1.85, exit $1.48, +.37 gain.


GRUB - GrubHub Inc (Aug Short Put 6/28)

GrubHub had broken out to a new high until the Nasdaq crashed and knocked it back to support at $100. It actually never reached support because eager buyers kept jumping the gun.

Earnings July 25th.

Sell short Aug $90 put, currently $2.50, stop loss $98.50.

Update 7/26: I neglected to remind readers to close the GRUB position the day before earnings as we always do. I am sure readers exited rather than held a short position over an earnings report. We always close at the open the morning before earnings.

Closed Aug $90 short put, entry $2.45, exit .89, +$1.56 gain.


HD - Home Depot (Aug Put Spread 7/12)

Home Depot shares have been maintaining a minor uptrend with the exception of the market decline the last week of June. There is actually only minor volatility inside the trend. They should not be materially impacted by the tariffs.

Earnings August 14th.

Sell short Aug $190 put, currently $1.67, stop loss $195.50.
Buy long Aug $180 put, currently .57, No stop loss.
Net credit $1.10.

Update 7/26: Home Depot was breaking out the prior week but the rally stalled with the weak market. We were stopped on the older spread at $199.85 and at $199.65 on the new spread. I am leaving the long puts open because the trend appears to have reversed lower.

Closed Aug $190 Short put, entry $1.55, exit $1.00, +.55 gain.
Retain Aug $170 long put, entry .60, currently .30.


HD - Home Depot (Aug Put Spread 7/19)

Home Depot is surging on the back of high retail sales numbers, falling unemployment and strong home sales. The stock broke out to a 5-month high close on Thursday. As long as this momentum holds for a couple more days we should be safe at $195.

Earnings August 14th.

Sell short Aug $195 put, currently $1.42, stop loss $199.85.
Buy long Aug $185 put, currently .40, no initial stop loss.
Net credit $1.02.

Update 7/26: Home Depot was breaking out the prior week but the rally stalled with the weak market. We were stopped on the older spread at $199.85 and at $199.65 on the new spread. I am leaving the long puts open because the trend appears to have reversed lower.

Closed Aug $195 short put, entry $1.50, exit $2.00, -.50 loss.
Retain Aug $185 put, entry .39, currently .54.

Update 8/9: Last week I recommended closing the long put on HD while it still had value.

Closed Aug $185 long put, entry .39, exit .77, +.38 gain.
Previously closed Aug $195 put, entry $1.50, exit $2.00, -.50 loss.
Net loss 12 cents.


IRBT - iRobot (Sep Short Put 8/16)

IRobot beat on earnings and raised guidance. Shares spiked 20% before falling back $15. That post earnings depression has faded and shares are making new highs.

Earnings October 23rd.

Sell short Sep $80 put, currently $1.05, stop loss $84.50.


NFLX - Netflix (Aug Short Put 6/21)

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.

Update 6/28: We were blown out of both out of Netflix positions last Monday with that 8% intraday drop of -32 points and the -211 point drop on the Nasdaq. We escaped with a profit on the July position but the August position had too much time left and the option premiums exploded.

Closed July $300 short put, entry $5.37, exit $1.45, +$3.92 gain.

Closed Aug $330 short put, entry $4.20, exit $7.54, -$3.34 loss.


PANW - Palo Alto Networks (Sep Short Put 7/26)

Palo Alto just priced $1.5 billion in convertible notes at 0.75% interest and a convertible price of $266. The stock is currently trading at $215. Palo Alto is also trending steadily higher despite periodic volatility. Under no scenario does anyone expect cyber security to be less of a problem in the future and that makes the outlook bright for PANW.

Earnings September 3rd.

Sell short Sept $185 put, currently $2.41, stop loss $206.25.

Update 8/2: The three day -329 point drop on the Nasdaq Composite crushed Palo Alto and all the big cap tech stocks. We were stopped out for a loss.

I am going to recommend a new position on PANW.

Closed Sept $185 short put, entry $3.00, exit $3.89, -.89 loss.


PANW - Palo Alto Networks (Sep Short Put 8/2)

PANW suffered from the Nasdaq crash and stopped us out of the prior position. I am going to try another short put on this stock. The rebound is very strong.

Earnings September 3rd.

Sell short Sept $180 put, currently $2.39, stop loss $198.50.

Update 8/16: The Nasdaq crash at the open on Wednesday was brutal. The index lost -97 for the day but it was down -135 at the open. This knocked us out of PANW for a minor gain.

Closed Sep $180 Short Put, entry $2.90, exit $2.50, +.40 gain.


SHOP - Shopify (Aug Short Put 7/5)

We just exited a successful position on Shopify and the premiums are still inflated since the big drop in mid June. There appears to be a rebound in progress.

Earnings July 31st.

Sell short Aug $130 put, currently $3.20, stop loss $144.65.

Update 8/3: We escaped a beating on this position with our tight stop loss. We were stopped out at $167.85 on Friday and SHOP went on to lose 40 points for the week.

Closed Aug $130 short put, entry $2.95, exit $1.00, +1.95 gain.


SIG - Signet Jewelers (Sep Call Spread 7/26)

Signet is coming back from a rough spring where the stock collapsed on less than expected earnings. The stock is about to breakout to a 9-month high. Expectations are rising again thanks to their "Signet path to brilliance" plan.

Earnings August 30th.

Sell short Sept $50 put, currently $1.60, stop loss $58.85.
Buy long Sept $40 put, currently .40, no stop loss.

Net credit $1.20.

Update 8/3: Signet was downgraded by Nomura from buy to neutral on Tuesday with a $62 price target. That was enough to knock more than $5 off the price and stop us out at $58.85 on the short side. The stock is trying to rebound so I am recommending we close the long put.

Closed Sept $50 short put, entry $1.64, exit $2.30, -.66 loss.
Close Sept $40 long put, entry .38, currently .50.

Update 8/9: We were stopped out of the short side of the spread the prior week. I recommended closing the long put at the open last Friday while it still had some value.

Closed Sep $40 long put, entry .38, exit .45, +.07 gain.
Previously closed Sep $50 short put, entry 1.64, exit 2.30, -.66 loss.
Net loss 59 cents.


SINA - Sina Corp (Aug Call Spread 7/19)

Shares of SINA have been declining since March and have given back a third of their value. Over the last two months shares have found a soft bottom at $84 but that appears to be cracking with Thursday's close a three week low.

Earnings August 8th. (18 days)

Sell short Aug $90 Call, currently $1.38, stop loss $86.
Buy long Aug $100 Call, currently .34, no initial stop loss.
Net credit $1.04.

Update 8/9: Sina reported earnings on August 8th and readers should have exited the position at the open on the 7th. This is one time where waiting until earnings would have been beneficial but we should never hold a short position over an earnings report.

Closed August $90 short call, entry $1.50, exit .47, +$1.03 gain.
Retain August $100 long call, entry .34, currently .03.


TSLA - Tesla Inc (Aug Short Put 6/21)

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.

Update 7/5: Tesla had a super volatile week. They announced they hit their production goal on the Model 3 at 5,000 per week at the end of June. Investors sold the news after multiple analysts either downgraded the stock or talked it down as not repeatable on a routine basis. They called it "surge production." Shares fell 15% from Monday's high and we were stopped at $324.25. Fortunately the tight stop meant we only lost 10 cents.

Closed Aug $20 short put, entry $4.90, exit $5.00, -.10 loss.


TTD - The Trade Desk (Aug Short Put 7/12)

The TradeDesk exploded higher in May and so far it has not given back any of the gains. Shares closed at a new high on Thursday. Analysts are high on the outlook for earnings.

Earnings August 9th.

Sell short Aug $80, currently $2.15, stop loss $90.65.

Update 7/26: The market volatility on the 24/25th caused TTD shares to fall more than $10 over two days to stop us out.

Closed Aug $80 short put, entry $2.28, exit $2.24, +.04 gain.


UBNT - Ubiquiti Networks (Aug Put Spread 6/28)

Ibiquiti has withstood the Nasdaq weakness pretty well and closed at the high for the week on Thursday. There is strong support at $80 giving us a $10 cushion before out shot strike could be hit.

Earnings August 9th.

Sell short Aug $70 put, currently $2.60, stop loss $78.85.
Buy long Aug $60 put, currently $1.40, no stop loss.
Net credit $1.20.

Update 7/26: The market volatility on the 24/25th knocked us out of a lot of positions. UBNT was already heading lower and the volatility just accentuated the move. I serioudly dount the August $60 long put will appreciate so I am recommending we close it.

Closed Aug $70 short put, entry $2.41, exit .95, +1.46 gain.
Close Aug $60 long put, entry $1.06, currently .60, -.46 loss.

Update 8/2: We closed the left over August $60 long put at the open on Friday.

Closed Aug $60 long put, entry $1.06, exit .20, -.86 loss.
Previously closed Aug $70 short put, entry $2.41, exit $.95, +1.46 gain.
Net gain 60 cents.


WIX - Wix.com (Aug Put Spread, Short Put 7/5)

Wix is a website hosting platform where users can choose from hundreds of basic formats, plug in their pictures and text and have a running website in just a very few minutes. The chart has a nice trajectory with the obligatory decline with the market over the last couple weeks but it is recovering nicely.

Earnings August 9th.

Put spread:
Sell short Aug $90 put, currently $2.20, stop loss $97.65.
Buy long Aug $80 put, currently $1.00, no stop loss.
Net credit $1.20.

Alternate position

Short put:
Sell short Aug $90 put, currently $2.20, stop loss $97.65.

Update 7/19: No specific news. WIX shares fell with the market at the open to stop us out.

I had this as two different positions. One was just the short put and the other was a spread. I am recommending we close the long $80 put because it is well out of the money and still has value.

Closed Aug $90 short put, entry $2.08, exit $1.85, +.23 gain.
Close Aug $80 long put, entry .85, currently .75, -.10 loss.

Update 7/26: We had a left over long put from the aborted spread. I recommended we close it at last Friday's open.

Closed Aug $80 long put, entry .85, exit .50, -.35 loss.
Previously closed Aug $90 short put, entry $2.08, exit $1.85, +.23 gain.
Net loss .12


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.