Tuesday, January 01, 2019  11:50:37 PM

Trend Change?

by Jim Brown

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Review prior updates here: 2014  2015  2016  2017  2018  2019 
After two days of better than 800-point closing rallies, the trend may have changed. The Dow surged for a 1,086-point gain on Wednesday after a 340-point decline early in the day. On Thursday the Dow was down -609 at 2:30 and roared back 869 points to close with a 260-point gain in the last 90 minutes.

On Thursday evening the S&P futures have traded as high as +9 and remain positive as I type this commentary. This is the first time in weeks that I remember the futures being positive after a big gain. The two 800+ point rebounds must have convinced some traders that the bottom is behind us.

Here is the challenge. Tax loss selling should have been over last week. Monday's 600-point decline was due to the attack on Fed Chair Jerome Powell and Treasury Secretary Mnuchin calling the heads of the top 6 banks to ask if they had enough liquidity to weather the storm. That immediately created worries that the government knew something we did not, and the market crashed again.

Fast forward to Wednesday and the early dip was bought causing a monster short squeeze. As expected, the market opened lower on Thursday after the 1,086-point Dow gain. Nobody in their right mind would have expected the index to just continue higher.

Thursday's rebound was a confirmation of Wednesday's bullishness and another short squeeze after the 600-point intraday decline.

Friday should see a continuation of short covering but also the possibility of profit taking given the big rebounds. Monday's unexpected high-volume drop could have poisoned the outlook for the coming Monday, also a very low volume day in normal years.

Starting on Tuesday we are in a new tax year and everyone who has been white-knuckled over the last several weeks just waiting for the tax year to roll over so they could bail on existing positions, will have their chance. It could be a choppy week and the partial government shutdown will be blanketing all the news outlets because the new House members will be on the attack.


With the Dow moving in 500-1000 point swings, selling premium is still going to be a high risk trade. If the Dow can gain 1,000 points it can also lose 1,000 points. Volatility remains extremely high and two days does not make a trend.

I did recommend some plays this week, but they are based on the assumption the market should be flat to positive over the next couple weeks. That could be a flawed assumption given the new tax year and the unknown results.

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


December Expirations

Our remaining December positions expired at the close last Friday. There was no material change from the prior week. The McKesson position was closed at the open while it still had value.


New Recommendations


The market continues to be crazy with 500-1000 point intraday swings. We are holding at new lows. Selling premium in this market is suicide. Given the potential for a directional change I am going to try and launch a couple new positions. This is still a high-risk market for premium sellers.


COST - Costco (Feb Short Put)

Costco bottomed at $190 after reporting earnings on the 13th. The earnings were great but they were picked apart by investors in a massively declining market. The $190 level should be the bottom unless the market rolls over again in January.

Earnings March 14th.

Sell short Feb $180 put, currently $2.24, stop loss $193.25.



CRM - SalesForce.com (Feb Short Put)

Salesforce has rallied $15 off the bottom at $120 over the last two days. If the market rally continues this will be a rocket back over $150.

Earnings Feb 26th.

Sell short Feb $115 put, currently $2.29, stop loss $124.50.



BABA - Alibaba (Feb Short Put)

Alibaba appears to have bottomed at $130 as long as the market does not roll over again in January. The Feb put premiums are very high because earnings are Feb 1st. This means we will have to exit in late January.

Earnings Feb 1st.

Sell short Feb $120 put, currently $3.20, stop loss $132.25.



New Covered Call Recommendations


No New Covered Calls

The volatility continues to be extreme. I am not recommending covered calls this week.


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.


AAP - Advance Auto Parts (Nov Put Spread 9/27)

Shares dipped on the 18th to touch $160 but were immediately bought. Prices have rebounded to $169 and are holding at recent highs.

Earnings November 21st.

Sell short Nov $155 put, currently $2.55, stop loss $165.50.
Buy long Nov $145 put, currently $1.15, no stop loss.
Net credit $1.30.

Update 10/4: No specific news. Shares rolled over with the market to stop us out on the short put.

Closed Nov $155 short put, entry $2.70, exit $3.40, -.70 loss.
Retain Nov $145 long put, entry $.80, currently $1.60.


AAP - Advance Auto Parts (Nov Put Spread 10/18)

AAP took a dive on Wednesday after Walmart said ti was partnering with AAP to create a specialty qutoparts store on Walmart.com. I don't see the reason for the decline since this will help AAP compete with O'Reilly and Autozone. AAP only does $9 billion in annual revenue and the sector generates more than $100 billion in sales. It sounds like a win-win to me. Shares dipped to $154 on the announcement but have rebounded $8 since Wednesday's low.

Earnings Nov 21st.

Sell short Nov $145 put, currently $2.10, stop loss $155.85.
Buy long Nov $135 put, currently $1.00, no stop loss.
Net credit $1.10.


AAPL - Apple Inc (Nov Put Spread 10/4)

Apple broke out over $230 to a new high on Wednesday. Thursday's $4 decline was only a partiao retracement of their $13 gain over the last week or so.

There is very strong support at $217 and Apple should post killer earnings on Nov 1st on strong iPhone sales. We will exit the day before earnings.

Earnings Nov 1st.

Sell short Nov $210 put, currently $2.73, stop loss $223.50.
Buy long Nov $200 put, currently $1.46, no stop loss.
Net credit $1.27.

Update 10/11: The Nasdaq crash stopped us out of the short side on the Apple position. I am recommending we close the long side because Apple is going to rebound in any positive market.

Closed 10/5: Nov $210 put, entry $2.67, exit $4.10, -1.43 loss.
Close Nov $200 long put, entry $1.47, currently $4.70, potential gain $3.23.


ADBE - Adobe Systems (Nov Short Put 10/18)

Adobe raised guidance this week and helped to kick start the Tuesday rally. Shares retraced some gains but assuming the market does not make new lows, Adobe should be an out performer.

Earnings Dec 13th.

Sell short Nov $225 put, currently $2.02. Stop loss $236.85.

Update 11/1: It should be no surprise that a 14% decline in the Nasdaq in three weeks caused us to be stopped out of Adobe. The monster market decline on Monday afternoon spiked put prices on everything causing us a big loss.

Closed 10/29: Nov $225 short put, entry $1.64, exit $5.00, -3.36 loss.


ADBE - Adobe Systems (Dec Short Put 11/8)

Adobe has not closed behind its 200-day average at $239 since January 2016. The stock tried to sell off in the Nasdaq decline but support at $238 was strong.

Earnings December 14th.

Sell short Dec $220 put, currently $2.70, stop loss $236.85.

Update 11/16: Adobe had not broken its 200-day since January 2016. However, the second Nasdaq correction dip was too much negativity. Not only did the 200-day break but also the support at $238.

Closed Dec $220 short put, entry $3.00, exit $5.80, -2.80 loss.


FB - Facebook (Nov Put Spread 9/20)

Facebook shares have been depressed for two weeks but the last two days the stock has begun to rebound. Even if it does not move up from here, it has held support for the last two weeks.

Earnings Oct 16th.

Sell short Nov $160 put, currently $2.62, stop loss $159.00.
Buy long Nov $150 put, currently $1.17, no stop loss.
Net credit $1.45.

Update 10/4: The report of a new hack into 50 million Facebook accounts caused the shares to collapsed again and make a new five-month low. We were stopped on the short put and the long put is still active and profitable.

Closed Nov $160 short put, entry $5.50, exit $6.45, -.95 loss.
Retain Nov $150 long put, entry $2.41, currently $4.55, stop loss $160.50.


FB - Facebook (Nov Put Spread 10/4)

Facebook shares fell hard again on news of the new cyberattack. However, Facebook always seems to bounce back from these types of revelations. We are going to sell a put spread nearly $20 OTM and the stock is trying to cling to the $160 level.

Sell short Nov $140 put, currently $1.94, stop loss $154.50.
Buy long Nov $130 put, currently .83, no stop loss.
Net credit $1.11.

Update 10/11: We were stopped out of the short side the prior week on the news of a new hack of 50 million accounts. We retained the long put and we were rewarded when shares fell in the Nasdaq crash.

Closed 10/5: Nov $150 long put, entry $2.41, exit $5.40, +2.99 gain.
Previously closed Nov $140 short put, entry $5.50, exit $6.45, -.95 loss.
Net gain $2.04.

We were also stopped on the lower put spread.

Closed 10/8: Nov $140 short put, entry $1.83, exit $2.48, -.65 loss.
Close Nov $130 long put, entry $.79, currently $1.43, +.64 potential gain.


FB - Facebook (Dec Put Spread 11/16)

The bad news is priced into this stock. There was another round of negative headlines on Thursday and it recovered quickly from the opening dip. There is a reasonable chance that $140 remains terminal support.

Earnings January 30th.

Sell short Dec $130 put, currently 1,75, stop loss $139.75.
Buy long Dec $120 put, currently .79, no stop loss.
Net credit 96 cents.

Update 11/29: Facebook did not wait for the market crash on the 20th. Shares continued to implode almost immediately upon entry into this position. FB appears to be gravely injured and while still a great business model, there are warts popping up everywhere.

Closed Dec $130 short put, entry $2.37, exit $2.70, -.33 loss.
Close Dec $120 long put, entry .93, currently .43, -.50 loss.

Update 12/13: We closed the leftover long put at the open on 11/30.

Closed Dec $130 short put, entry $2.37, exit $2.70, -.33 loss.
Closed 11/30 Dec $120 long put, entry .93, exit .51, -.42 loss.


Five - Five Below (Dec Put spread 11/8)

Five below is a specialty retailer similar to a Dollar General or Dollar Tree but everything in the store is less than $5. Like the rest of the sector, the stock has been up and down multiple times in 2018. The correction low was $110 and I am using a spread below that level.

Earnings December 6th.

Sell short Dec $105 Put, currently $1.95, stop loss $116.00.
Buy long Dec $95 put, currently .95, no stop loss.
Net credit $1.00.

Update 11/29: FIVE gapped down -13 with the market on the 20th to stop us out.

Closed Dec $105 short put, entry $1.86, exit $2.90, -1.04 loss.
Retain Dec $95 put, entry .76, currently $2.18, stop loss $107.85.

Update12/13: FIVE gapped down -13 with the market on the 20th to stop us out. We had a long put with a stop loss and the stock gapped up more than $5 on the 3rd to stop us out of that long position.

Closed Dec $105 short put, entry $1.86, exit $2.90, -1.04 loss.
Closed 12/3 Dec $95 put, entry .76, exit $1.00, +.24 gain.


LRCX - Lam Research (Nov Short Put 10/18)

Lam posted decent earnings and guidance and spiked to $154 on the news. The week market has seen some of those points bleed away but there is strong support around $143.

Earnings Jan 15th.

Sell short Nov $125 put, currently $2.00. Stop loss $139.85.


LULU - Lululemon (Nov Call Spread 10/4)

Shares peaked at $164 the prior week and have declined to $157 on the market weakness. LULU has a nice base built and could go higher but the strong gains since last December suggests there may be more sellers than buyers in the weeks ahead.

Earnings Nov 20th.

Sell short Nov $170 call, currently $2.00. Stop loss $163.25.
Buy long Nov $180 call, currently .79, no stop loss.


MED - Medifast (Nov Short Put 9/27)

Medifast was knocked for huge loss from $260 to $181 last week on no specific news. Shares had simply gotten ahead of themselved and profit taking appeared. After the instant rebound they have held over $210 and are faithfully following the 50-day average higher. We are going to sell a put $40 out of the money.

Earnings November 1st.

Sell short Nov $180 put, currently $4.80, stop loss $207.25.

Update 5/11: We were killed on MED and the stock barely moved. It opened down $1 on the 8th then dipped lower as the day progressed. We were stopped in the opening minutes before there was any major decline but the short put opened at $13 and twice the premium we sold. This was a $180 put with the price at $212. The market makers were taking advantage of the week market to jack up the premium. We were caught in the trap.

Closed 10/8: Nov $180 short put, entry $4.70, exit $13.90, - 9.20 loss.

Update 12/13: We closed the short put on the 30th.

Closed Dec $180 short put, entry $2.51, exit $.23, +$2.28 gain.
Retain Dec $170 long put, entry $1.35, currently .15, no stop loss.


MCK - McKesson (Dec Put spread 11/1)

McKesson is rebounding strongly out of the market crash and is now $12 above its correction lows.

Earnings January 24th.

Sell short Dec $120 put, currently $1.95, stop loss $122.50.
Buy long Dec 110 put, currently .75, no stop loss.

Net credit $1.20.

Update 11/29: We were stopped on the short put in the 600-point gap lower on the 20th.

Closed Dec $120 short put, entry $3.10, exit $2.87, +.33 gain.
Retain Dec $110 long put, entry $1.20, currently .35, no stop loss.


MED - Medifast (Dec Short Put 11/13)

Medifast crashed on earnings and has been moving sideways for a week. There is a minor uptick visible over the last several days. I believe the selling is over and we should be safe at $140 unless the market continues tanking.

Earnings February 1st.

Sell short Dec $140 put, currently $2.35, stop loss $148.50.

Update 11/29: Medifast gapped down $6 with the market on the 20th to stop us out. No specific news. Just a weak market.

Closed Dec $140 short put, entry $3.00, exit $4.70, -1.70 loss.


MMM - 3M (Dec Put spread 11/1)

3M is rebounding out of its post earnings crash lows and any positive news out of China would send it into the stratosphere. Earnings disappointed but the stock is recovering.

Earnings January 22nd.

Sell short Dec $180 put, currently $2.77, stop loss $186.25
Buy long Dec 170 put, currently $1.45, no initial stop loss.
Net credit $1.32.


NVDA - Nvidia (Nov Short Put 10/4)

Shares got a bump this week after Evercore ISI upgraded their target price to $400. Shares spiked to a new high before fading slightly in the Nasdaq decline. I firmly believe we will see $400 next year but that does not mean there is no risk at $250. This strike is $30 OTM but Nvidia can move quickly. I am counting on the Nasdaq coming back to life soon.

Earnings Nov 15th.

Sell short Nov $250 Put, currently $4.40, stop loss $264.85.

Update 10/11: Nvidia imploded in the chip wreck that was helping to drive the Nasdaq lower. We were stopped for a big loss on the short put when the Nasdaq gapped down on Monday.

Closed 10/8: Nov $250 short put, entry $3.67, exit $9.00, -5.33 loss.


PVH - PVH Corp (Nov Put Spread 9/27)

PVH shares were hammered after earnings to bottom at$131.60. Shares are rebounding after two weeks of consolidation.

Earnings Nov 23rd.

Sell short Nov $135 put, currently $1.70, stop loss $139.85.
Buy long Nov $125 put, currently .60, no stop loss.
Net credit $1.10.

Update 10/4: No specific news. Shares rolled over with the market to stop us out on the short put. Two weeks of gains evaporated in three days.

Closed Nov $155 short put, entry $2.70, exit $3.40, -.70 loss.
Retain Nov $145 long put, entry $.80, currently $1.60.


RH - RH Inc (Oct Short Put 9/13)

Formerly Restoration Hardware, RH shares fell nearly $40 after earnings. Over the last two days they have rebounded sharply after the CEO bought $1 million in shares in the open market. Last week the company opened its largest store, a 95,000 sqft giant in New York City. It cost the company $50 million but the CEO believes it will produce $100 million a year in revenue.

Earnings Dec 4th.

Sell short Oct $120 put, currently $2.30, stop loss $127.65.

Update 9/27: RH dipped just enough on the market decline on Monday to stop us out of the short put position.

Closed Oct $120 short put, entry $2.33, exit $1.95, +.38 gain.


ROKU - (Nov Short Put 9/20)

Roku closed at a new high on Thursday and after the week of consolidation it may be ready to run again.

Sell short Nov $60 put, currently $2.20, stop loss $68.50.

Update 10/4: Roku declined $11 in three days after making a new high on Monday. There was no news. We were stopped on Wednesday for a breakeven.

Closed Nov $60 short put, entry $2.17, exit $2.11, +0.06 gain.


SHOP - Shopify (Jan Short Put 11/30)

Shopify has reboundex sharply from the November 20th low. Shares have rebounded to their mid November resistance at $151. If the positive market continues, SHOP should also break out and continue higher.

Earnings January 24th.

Sell short Jan $125 Put, currently $3.00, stop loss $138.85.

Update 12/20: SHOP shares were crushed after the company announced a secondary offering of 2.6 million shares.

Closed 12/14: Short Jan $125 put, entry $2.90, exit $4.24, -1.34 loss.


SRPT - Sarepta Therapeutics (Jan Short Put11/30)

Sarepta tested the support of the 200-day average twice in November. Shares have returned to early November resistance at $130. I believe a positive market will allow SRPT to move higher.

Earnings February 7th.

Sell short Jan $105 put, currently $3.05, stop loss $119.35.

Update 12/13: Sarepta fell $10 from Dec 3rd high to the open on Dec 6th to stop us out of the short put.

Closed Jan $105 short put, entry $3.23, exit $4.99, -1.76 loss.


TSLA - Tesla Inc (Nov Short Put 9/27)

If you feel like living dangerously and taking a walk on the wild side, short puts on Tesla on Friday morning. The SEC sued Elon Musk about his going private tweet. Shares fell $37 in afterhours to close at $270. The Nov $200 put is quoted at $3.90 at the close. After the post close news you can bet the stock will crash at the open however, now that the bad news is in the market, it may not decline the entire $37. Either way the put is going to spike in value because investors do not know where the decline will stop. I suggest if it declines to $250 that would be a hard floor. Any opening print put premium is likely to be enormously high and eill evaporate quickly once the stock finds a bottom.

HIGH RISK

Sell short Nov $200 put, currently $3.90, stop loss $247.50.

Update 10/11: Thank you Elon Musk for being an idiot. This would have been a great put position if Musk had kept his mouth shut. (tweet) He launched an attack on the SEC and shares gave back all their rebound gains. We escaped with a gain ourselves but it would have been much nicer had Musk lost his phone.

Closed 10/5: Short Nov $200 put, entry $7.43 exit $5.90, +1.53 gain.


UBNT - Ubiquiti Networks (Dec Put Spread 11/16)

Ubiquiti posted great earnings and spiked higher. After a couple days of post earnings depression the stock is rising again and closed at a new high on Thursday.

Earnings February 8th.

Sell short Dec $100 put, currently $2.05, stop loss $105.50.
Buy long Dec $90, currently $1.05, no stop loss.
Net credit $1.00.

Update 11/29: UBNT gapped down -$5 with the market on the 20th to stop us out. No specific news. Just a weak market.

Closed Dec $100 short put, entry $2.50, exit $4.50, -2.00 loss.
Retain Dec $90 long put, entry .96, currently .43, no stop loss.


URI - United Rentals (Dec Short Put 11/1)

URI fell from $170 to $106 in the market crash. In two days it has rebounded $19 and has a long way to go. The bottom at $106 was tested for six consecutive days and held.

Earnings January 16th.

Sell short Dec $105 put, currently $1.75. Stop loss $110.75.

Update 11/15: Shares of URI ended their rebound attempt and rolled over with the market on Thursday after the election.

Closed Dec $105 short put, entry $1.70, exit $2.35, -.65 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.