Thursday, January 03, 2019  11:02:30 PM

Black Swan

by Jim Brown

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Review prior updates here: 2014  2015  2016  2017  2018  2019 
The combination of Apple's earnings warning and the two-year low in the Manufacturing ISM was a Black Swan event for the market. A black swan is a major event that nobody expects and catches the market by surprise. Apple had not warned on revenue in seven years. Despite the constant news from the various suppliers on cancelled orders, nobody really believed Apple was in trouble. There are always manufacturing rumors and Apple has always seemed to pull a rabbit out of their hat to beat estimates.

This time it is different. Apple originally guided for $89-$93 billion in revenue and analysts were expecting $91.5 billion. Their guidance warning is now targeting $84 billion. That is a significant miss for a company the size of Apple.

Apple said 18% of their business comes from China and revenue from China declined 25% over the last two months. They also blamed a lot of other factors but falling sales in China was their main complaint.

This came in the same week that China's economic numbers declined to a multiyear low and broadened expectations for a larger global slowdown.

On Thursday the US ISM Manufacturing for December fell from 59.3 to 54.1 and the lowest level since late 2016. Suddenly the global slowdown scenario picked up speed.

The slowdown in China was confirmed by weakness in Europe and now in the US, which is supposed to be the strongest economy.

This sudden apparent confirmation of economic weakness in multiple geographies was the black swan nobody was expecting.

Add in the multiple people in the US administration warning about China's aggressive behavior, biggest threat on the planet, need for more tariffs and the state Dept warning about travel to China and investors could not get out of stocks fast enough.

The Dow fell -660 points and closed at the low for the day. The Nasdaq had another 200-point decline. Resistance just over 2,500 on the S&P proved fatal for the short-term oversold bounce and the index fell -62 points.

There may be another short squeeze or dead cat bounce in our near future. However, the China weakness, global weakness, story is alive and well and will more than likely com back to haunt us.

With 600-900 point intraday swings, this is not a premium selling market. I am not adding any new plays until the volatility declines and a trend appears that last more than three days.

We could be headed for a retest of 2,350 on the S&P or another attempt to punch through 2,500. Either way these monster intraday moves, normally in opposite directions are too dangerous to play unless you are a day trader.

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

BABA - Alibaba

The Apple revenue warning and claims that business declined sharply in China over the last two months, hit Aliababa hard and caused a $6 or -4.5% decline on Thursday. This stopped us out just after the open for a breakeven.

Closed Feb $120 Put, entry $3.34, exit $3.35, -.01 loss.

New Recommendations

No New Recommendations

The market continues to be crazy with 500-1000 point intraday swings. We are holding just above the lows. Selling premium in this market is suicide. This is still a high-risk market for premium sellers.

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.

BABA - Alibaba (Feb Short Put 12/27)

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.

COST - Costco (Feb Short Put 12/27)

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 - (Feb Short Put 12/27)

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.

SHOP - Shopify (Jan Short Put 11/30)

Shopify has rebounded 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.

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.