The market is paying the penalty for negative changed to the tax rules.

There are multiple items in the new tax bills that are causing indigestion for the market. Add that to the need for some profit taking after the Dow's 800 point gain over the last two weeks and we have a lackluster market.

The first in, first out or FIFO rule chance, replacement of the corporate AMT with fewer deductions and the new carry rule that extends the period to 3 years in order to get taxed at capital gains rates, are all causing investors to rethink holding their gains into 2018.

Hedge fund managers will lose the favorable tax rates on carried interest starting in 2018 and it will be taxed as ordinary income instead of capital gains. This could cause quite a few managers to close positions in 2017 to get the favorable treatment on existing gains.

The FIFO rule will force investors to close less profitable positions in 2017 rather than have their most profitable positions taxed in 2018. If you have 100 shares of XYZ stock you bought at $25 two years ago and 100 shares you bought at $125 in 2017. You have a problem. If the stock is $150 today and you sell 100 shares you can pay tax on $25. If you wait until January 1st, your cost basis will be $25 and you will pay tax on $100. If the stock has gone down to $100 and you sell 100 shares in 2017 you can take the $25 loss on the higher cost shares. If you sold it in 2018 you would have to pay taxes on $75 because the cost basis will be the first 100 shares you bought at $25.

Everyone is furiously studying the impact of the new bill and keeping their fingers crossed the conference committee removes the FIFO from the bill before final passage.

The return of the corporate AMT in the senate bill comes without several prior deductions and would tax the return of cash from overseas at 20% instead of the new favorable rate of 10-12% as President Trump proposed. The AMT in the proposed configuration would negate much of the pro business reform in the House bill.

The growing cloud over the market is the investor realization that there will be some unpleasant changes in the current version of the bill. If it appears these items are going to be left in the bill, we could see a significant downdraft in the market if passage appears imminent.

The S&P has slipped well off its high but it remains in striking distance of 2,650 and the current target for year end. Quite a few analysts had targets lower than that but only a couple had higher targets. Since we have reached this level, the conversation has tended to gravitate to that level as the consensus.


The Dow has retreated from the 24,500 high but the decline on Wednesday was minimal. The big gainers in the Dow are going to see some heavy profit taking if the tax bill does not change. Gains in stocks like BA, MCD, MMM and CAT could be taken in 2017 instead of holding over. That could cause a serious drop in the overbought index.


The Nasdaq may have completed its 3-week decline and be ready to rally again. Profits have already been taken in the big cap tech stocks after two days of serious sector rotation. Note in the chart below that the time between each dip has grown shorter as the rally progressed. Investors are not willing to hold the gains as long and appear to be getting nervous. The last period was only 3 weeks. That suggests we are getting closer to a dip that may be deeper than the last 4.


The Russell 2000 broke support at 1,512 and any further decline targets 1,500. The small caps should be in rally mode in December. This is their normal month for gains.


This is the sweet spot in the earnings cycle with the next batch of earnings starting in mid January. That gives us plenty of play possibilities. However, the recent market volatility has done a number on the charts and very few stocks have a decent trend. Even the good companies reacted negatively to the recent Nasdaq rotation. The tech stocks are in limbo while we wait for a new trend to appear and the industrials are sky high and the option premiums do not work.

I tried to add some low volatility positions this week. Whether or not they work out that way will depend entirely on the market.

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

Covered Calls



Current Position Changes


FB - Facebook (Jan Put Spread)

Over the last week the Nasdaq has collapsed with the FANG stocks leading the decline. When I recommended the FB put spread last week the stock had dropped $7 to $175 and support. That was the first rotation day for the Nasdaq. The second rotation day was this week and we were stopped out at $169.50 at the open on Tuesday. Shares have already rebounded to $176.

When the market decides to take profits it can be immediate and painful. I am going to try the short put again since we already have a long put.

Closed Jan $165 short put, entry $2.18, exit $3.80, -1.62 loss.
Retain Jan $155 long put, entry .89, currently .64.

Sell short Jan $165 put, currently $1.77, initial stop loss $170.65.



We closed nine positions last Thursday. (Closures)

In order to save space today, I am not going to repeat the entire play in text form. Everything is in the portfolio graphic with a "Closed" description. If you were in one of those positions, you know what happened.


New Recommendations


ALB - Albemarle Corp (Jan Call Spread)

ALB has declined for the last week after topping out just over $140 for two months. If the tax bill carries forward the negative items weighing on the market over the last couple days, we could see additional selling in stocks with big gains for the year.

Earnings Feb 3rd.

Sell short Jan $140 call, currently 75 cents, initial stop loss $135.65.
Buy long Jan $150 call, currently 25 cents, no stop loss.
Net credit 50 cents.



ACIA - Acacia Communications (Jan Put Spread)

Acacia shares have been moving up despite the weak Nasdag. Wednesday's close was a five week high. This is a low dollar position but the risk should be minimal.

Earnings Feb 3rd.

Sell short Jan $35 put, currently .70, initial stop loss $37.75.
Buy long Jan $30 put, currently .20, no stop loss.
Net credit 50 cents.



LRCX - Lam Research (Jan Short Put)

The chip sector has been hammered over the last eight days but the selling should be about over. The $SOX rose slightly on Wednesday and LRCX has found prior support at $181.

Earnings Jan 16th.

Sell short Jan $165 put, currently $2.40, initial stop loss $174.85.
Buy long Jan $155 put, currently $1.40, no stop loss.
Net credit $1.00.



New Covered Call Recommendations


No New Covered Calls

See the extra play graphic for suggestions.


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.

January expiration is the 19th.




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.


AAOI - Applied Optoelectronics (Jan Short Put)

This stock behaved very well on Wednesday and actually posted a gain of 62 cents when the tech world was crashing. With this kind of relative strength it should do well in a positive market.

Earnings Feb 8th.

Sell short Jan $35 put, currently $1.60, initial stop loss $39.50.


AAPL - Apple Inc (Jan Put Spread 11/22)

Apple shares have caught fire again with a $5 gain over the last two days. The stock is back near its highs and the holiday shopping season is going to be huge for iPhones.

Earnings Fed 3rd.

Sell short Jan $165 put, currently $1.56, initial stop loss $169.45.
Buy long Jan $155, currently .54, no stop loss.
Net credit $1.02.

Update 11/29/17:

AAPL - Apple Inc (Jan Put Spread)

Apple shares declined for the last three days with a big $3.50 drop today. We were stopped out on the short put for a big loss.

Closed Jan $165 short put, entry $1.31, exit $2.70, -1.39 loss.
CLOSE Jan $155 long put, entry .64, currently 1.08, est gain .44.
Estimated net loss 95 cents.


ADBE - Adobe Systems (Dec Call Spread - 10/25)

Adobe shot up $20 on raised guidance for 2018 at their investor day. This was a monster short squeeze and while it may not decline to fill the gap it should at least return to the mid $160s and uptrend support. The odds are slim that is will suddenly power higher to $185.

Sell short Dec $185 call, currently $1.72, stop loss $176.50.
Buy long Dec $195 call, currently .71, no stop loss.
Net credit $1.01.

Update 11/1/17:

ADBE - Adobe Systems (Dec Call Spread)

Adobe shares were fading from the post guidance spike when I recommended the call spread last week. The decline ended with a sharp rebound and we were stopped out on the short call position. We still have a long December call and if Adobe breaks out of its current range, we could profit from that position. If Adobe rolls over to $170 again I will resell another short call.

Closed Dec $185 short call, entry 2.02, exit 2.90, -.88 loss.
Retain Dec $195 long call, entry .89, currently .90, no stop loss.

Update 11/29: The Nasdaq drop today stopped us out of the remaining long call position for a minor gain.

Closed Dec $195 long call, entry $.89, exit $1.02, +.13 gain.
Previously closed: Dec $185 short call, entry $2.02, exit $2.90, -.88 loss.
Net loss 75 cents.

Closed Dec $200 long call, entry .83, exit .58, -.25 loss.
Previously closed: Dec 190 short call, entry $2.19, exit $2.81, -.62 loss.
Net loss 86 cents.


ADBE - Adobe Systems (Dec Call Spread - 11/15)

Adobe Systems appears to have run out of steam. The improved guidance in October caused a $31 spike in the stock and that spike is starting to lose traction. That was a 20% gain in less than a month. The $182 level appears to be resistance.

Earnings Dec 19th.

Sell short Dec $190 call, currently $1.98, stop loss $183.65.
Buy long Dec $200 call, currently .78, no stop loss.
Net credit $1.20.

Update 11/22: Resistance at $182 was holding nicely until the market spike on Tuesday where all the big cap tech stocks surged higher. We were stopped on the short call side of the spread.

Closed Dec $190 short call, entry $2.19, exit $2.81, -.62 loss.
Retain Dec $200 long call, entry .83, currently .65, stop loss $181.25.

Update 11/29: The Nasdaq drop today stopped us out of the remaining long call position for a minor gain.

Closed Dec $200 long call, entry .83, exit .58, -.25 loss.
Previously closed: Dec 190 short call, entry $2.19, exit $2.81, -.62 loss.
Net loss 86 cents.


ADSK - Autodesk (Jan Put Spread 11/22)

Shares of Autodesk have taken off after their earnings. Shares closed at a new high on Wednesday. Premiums are high and we can sell well out of the money on this one.

Earnings Feb 13th.

Sell short Jan $115 put, currently $2.11, initial stop loss $122.50.
Buy long Jan $100 put, currently .94, no stop loss.
Net credit $1.17.

Update 11/29/17: The earnings site I used for Autodesk earnings was incorrect. The earnings were after the close on Tuesday. I recommended on Monday evening that we exit the position at the open on Tuesday.

Closed Jan $115 short put, entry $2.00, exit $2.03, -.03 loss.
Closed Jan $100 long put, entry .75, exit .55, -.20 loss.
Net loss 23 cents.


BWLD - Buffalo Wild Wings (Dec Call Spread - 11/15)

Earlier this week Roark Capital made an unsolicited offer of $150 per share of $2.3 billion to acquire BWLD. This was a 28% premium to where the stock was trading. The CEO was already planning to leave at year end and BWLD just lost a proxy fight with an activist investor to put 3 directors on the board and force the company to sell itself. This offer came at the right time and the easiest out for BWLD is to accept it. Typically, the stock price does not gravitate to the offering price until just before the closing which would be months from now. If BWLD starts whining about terms or payment the price could fall. The only risk to this position would be a competing offer and with the business is stress that is a remote chance. Even if Roark sweetened the bid by a couple dollars the price would not likely move over $150 by December expiration.

Earnings Jan 26th.

Sell short Dec $150 call, currently $3.10, stop loss $148.65.
Buy long Dec $165 call, currently .80, no stop loss.
Net credit $2.30.

Update 11/19/17: Previously: Last week Roark Capital made an unsolicited offer of $150 per share of $2.3 billion to acquire BWLD. This was a 28% premium to where the stock was trading. The CEO was already planning to leave at year end and BWLD just lost a proxy fight with an activist investor to put 3 directors on the board and force the company to sell itself. This offer came at the right time and the easiest out for BWLD is to accept it. Typically, the stock price does not gravitate to the offering price until just before the closing which would be months from now. The only risk to this position would be a competing offer and with the business is stress that is a remote chance. Even if Roark sweetened the bid by a couple dollars the price would not likely move over $150 by December expiration.

Everything was working fine until Tuesday. We found out that Activist investor Marcato Capital, which now controls 3 board seats, built their position in the mid $140s claiming the chain was worth up to $400 a share. For Marcato to accept the $150 price immediately after winning a proxy battle for those seats, would almost be admitting defeat. With 3 seats they are in a position to either force a significantly higher bid or reject it entirely and try to forge ahead with the restructuring or even take the company private.

The chatter about a potentially higher bid mentioned a $170 price that Marcato might be willing to accept. While that may be out of Roark's range they can always meet in the middle. Shares rebounded from $136 to $146 in two days on the chatter. We cannot risk the potential for a higher offer to appear. I am recommending we close the short call position and leave the long call open.

We found out on Tuesday that Arby's made a $157 offer to cinch the deal. Exiting the position on the market chatter was the right call.

Closed short Dec $150 call, entry $3.30, exit $3.10, +.20 gain.
CLOSE long Dec $165 call, entry .83, currently .05, -.71 loss.
Net loss 51 cents.


COST - Costco (Dec Put Spread 11/8)

Costco is recovering from all the bogus worry over the Whole Foods acquisition by Amazon. Shares are well off the lows and broke over resistance on Wednesday.

Earnings Jan 4th.

Sell short Dec $160 put, currently $1.39, initial stop loss $163.75
Buy long Dec $145 put, currently .25, no stop loss.
Net credit $1.14.


DPZ - Domino's Pizza (Dec Put Spread - 10/25)

Domino's reported decent earnings but same store sales of 8.4% that beat estimates but was well below the 13.8% comp in the year ago quarter. Earnings were $1.27 and beat estimates for $1.22. Earnings rose 19.5% and revenue rose 13.5%. Anybody would love to have those stats and the sell off was overkill. Shares are starting to rebound from initial support.

Sell short Dec $175 put, currently $2.40, stop loss $179.85.
Buy long Dec $165 put, currently $1.15, no stop loss.
Net credit $1.25.

Update 11/1/17:

DPZ - Domino's Pizza (Dec Put Spread)

Papa John's (PZZA) reported earnings on Tuesday after the bell and disappointed on revenue. The CEO blamed the current NFL protest scenario on the weak sales. People are not watching the games and therefore they are not ordering pizza to eat during the game. The CEO blasted the NFL for a lack of leadership.

Domino's shares fell $6 intraday on Wednesday on worries their sales had fallen as well. We were stopped out on the short put.

Closed Dec $175 short put, entry $2.42, exit $3.70, -1.28 loss.
Retain Dec $165 long put, entry $1.17, currently 1.90. No stop loss.

  We were previously stopped out on the short put on DPZ when Papa John's disappointed on earnings. We were stopped on the long put on the 10th when shares began to rebound again.

Closed Dec $165 long put, entry $1.17, exit $2.40, +$1.23 gain.
Previously closed Dec $175 short put, entry $2.42, exit $3.70, -1.28 loss.
Net loss 5 cents.


FB - Facebook (Jan Put Spread 11/29)

Facebook has had very good relative strength until today. I believe it was just caught up in the tech downdraft and will rebound early once the selling is over. I am willing to try a put spread well out of the money because there is strong support at $170.

Earnings Jan 31st.

Sell short Jan $165 put, currently $2.36, initial stop loss $169.50.
Buy long Jan $155 put, currently .99, no initial stop loss.
Net debit $1.37.


GBT - Global Blood Therapeutics (Covered Call)

GBT is announcing new blood therapies almost weekly and this week they announced progress on a sickle cell treatment and shares broke out of a consolidation range on Wednesday. Premiums are huge so we can withstand some retracement.

Earnings Feb 3rd.

Buy-write Dec $40 call, currently $40.80-$4.20, stop loss $36.25.
Gain if called $3.40.


GS - Goldman Sachs (Dec Put Spread - 11/1)

Goldman and the rest of the banks should continue to trend higher with the Fed on track to hike rates again in December. Every quarter point hike in rates adds billions to their profits.

Earnings January 16th.

Sell short Dec $230 put, currently $2.18, stop loss $238.50.
Buy long Dec $220 put, currently $1.06, no stop loss.
Net credit $1.12.

Update 11/8/17:

GS - Goldman Sachs (Dec Put Spread)

Goldman spiked to nearly $248 last Thursday and then rolled over to touch $237 today. We were stopped on the short put at $238.50.

Closed Dec $230 put, entry $1.93, exit $3.35, -1.42 loss.
Retain Dec $220 put, entry $1.03, currently $1.08, no stop loss.


GWPH - GW Pharmaceuticals (Dec Short Put - 11/15)

GW broke out to a new 3-month high on Wednesday in a very weak market. The news was positive comments from the FDA on another of GW's marijuana based drugs. The breakout was double the normal volume. The earnings are before expiration but I am hoping the breakout will quickly reduce the premium and we will exit before earnings.

Earnings Dec 4th.

Sell short Dec $105 put, currently $1.70, stop loss $110.65.


LRCX - Lam Research (Dec Put Spread - 11/1)

LRCX has been on a roll with a $50 gain over the last three months. With the chip sector hot and every electronic device requiring a handful of chips, the sector is not likely to cool too rapidly. They beat on earnings and raised guidance.

Earnings January 16th.

Sell short Dec 185 put, currently $2.55, stop loss $195.65.
Buy long Dec $170 put, currently $1.05, no stop loss.
Net credit $1.50.

Update 11/29/17: The Nasdaq drop today stopped us out of the short Dec put positions for decent gains.

Closed Dec $185 short put, entry $2.89, exit .60, +$2.29 gain.
CLOSE Dec $170 long put, entry 1.02, currently .90, expected loss -.12.
Net estimated gain $2.17.


LRCX - Lam Research (Dec Put Spread 11/8)

Lam dipped on earnings and quickly recovered to close at a new high on Wednesday. Strong support just over $200.
Earnings Jan 16th.

Sell short Dec $195 put, currently $2.50, initial stop loss $201.50.
Buy long Dec $180 put, currently $1.10, no stop loss.
Net credit $1.40.

Update 11/29/17: The Nasdaq drop today stopped us out of the short Dec put positions for decent gains.

Closed Dec $195 short put, entry $3.07, exit $1.25, +$1.82 gain.
CLOSE Dec $180 long put, entry $1.25, currently $2.19, est gain .94.
Estimated net gain $2.76.


MDCO - Medicines Co (Covered Call 11/8)

MDCO crashed on earnings but the outlook is strong with a blockbuster cholesterol drug in four different Phase 3 trials.

Earnings Jan 30th.

Buy-write MDCO Dec $30 call, currently $30.39-$1.75, stop loss $27.85.
Gain if called $1.36.

Update 11/29/17: MDCO was a covered call we started on Nov 9th. Everything was looking good until the $2 drop with the Nasdaq to stop us out on Wednesday.

Closed MDCO shares, entry $30.26, exit $29.25, -1.01 loss.
Closed Dec $30 short call, entry $1.75, exit $2.00, -.25 loss.
Net loss $1.26.


NFLX - Netflix (Dec Call Spread - 10/26)

Netflix posted outstanding earnings and subscriber growth but shares immediately fell back from their record highs. Investors are struggling with the 188 PE and $7 billion in content spend for 2018. It may be time for this stock to rest.

Sell short Dec $210 call, currently $3.15, stop loss $203.50
Buy long Dec $225 call, currently $1.22, no stop loss.
Net credit $1.93.

Update 11/8/17: Netflix rallied on Monday to hit $202.48 and we were stopped on the short side of the Oct 26th call spread.

Closed Dec $210 short call, entry $3.27, exit $4.04, -.77 loss.
Retain Dec $225 long call, entry $1.32, currently .67, stop loss $194.25.

Update 11/15/17: We had previously closed the short Dec $210 call when we were stopped on the 6th. We retained the long $225 call but we were stopped on that on the 9th. We retained half the premium by stopping out.

Closed Dec $225 long call, entry $1.32, exit .66, -.66 loss.
Previously closed Dec $210 short call, entry $3.27, exit $4.04, -.77 loss.
Net loss 1.43.


NFLX - Netflix (Dec Call Spread - 11/1)

Shares have stalled since their blowout earnings and are trading sideways. With the markets looking top heavy it may be hard for Netflix to break through that $200 level.

Earnings January 17th.

Sell short Dec $215 call, currently $2.59, stop loss $203.50.
Buy long Dec $225 call, currently $1.34, no stop loss.
Net credit $1.25.


NFLX - Netflix (Jan Short Put 11/22)

Netflix is the gift that keeps on giving. Its high premiums and bullish bias keep giving us plays every week.

Earnings Jan 17th.

Sell short Jan $175 put, currently $2.74, initial stop loss $185.

Update 11/19/17:

NFLX - Netflix (Jan Short Put)

Netflix was caught in the Nasdaq crash with an $11 decline to stop us out for a big loss.

Closed Jan $175 short put, entry $2.51, exit $6.00, -3.49 loss.


NFLX - Netflix (Jan Put Spread 11/29)

If at first you don't succeed, try, try again. We were stopped on two Netflix positions on Wednesday but the $15 intraday drop was severely overdone. With any kind of positive market we should see Netflix rebound back over the $190 level, which was prior support.

Earnings Jan 17th.

Sell short Jan $160 put, currently $2.08, initial stop loss $174.50.
Buy long Jan $145 put, currently $1.02, no initial stop loss.
Net credit $1.06.


SHOP - Shopify (Jan Put Spread 11/22)

Shares closed at a 2-month high on Wednesday after a $12 gain over the last five days. Shares appear to be headed for a retest of the prior high just over $120.

Earnings Jan 31st.

Sell short Jan $95 put, currently $1.85, initial stop loss $101.50.
Buy long Jan $80 put, currently .55, no stop loss.
Net credit $1.30.

Update 11/29/17:

SHOP - Shopify (Jan Put Spread)

Shopify was caught in the Nasdaq decline with a -$12 intraday drop to stop us out of the short side.

Closed Jan $95 short put, entry $1.82, exit $3.90, -2.08 loss.
CLOSE Jan $80 long put, entry .45, currently .85, est gain .40.
Estimated net loss $1.68.


URI - United Rentals (Dec Put Spread 11/8)

United posted positive earnings and guidance and broke out to close at a new high on Wednesday. There is strong support at $140.

Earnings Jan 17th.

Sell short Dec $135 put, currently $1.50, initial stop loss $140.85.
Buy long Dec $120 put, currently .45, no stop loss.
Net credit $1.05.


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.