February expiration Friday has been a market turning point in many past years. Earnings are fading, Q1 earnings are declining, the major indexes are up 10% for the year and investors are starting to think about raising money for their taxes. While some traders will use the money right up until April 15th, others don't want to get locked into a trade where they could be forced to lose money if they have to exit to raise cash.
US negotiators, Mnuchin and Lighthizer, are headed to China this week to continue the talks held in the US the prior week. They are expected to last a couple days. Contrary to prior expectations we learned there is no scheduled meeting between President Trump and President Xi. This suggests as Larry Kudlow said on Thursday, we have a "sizeable distance to go" before we have a deal with China. Mnuchin said talks have been "very productive" but there remains a "wide range of issues" to be worked out.
With no meeting of the presidents before the March 1st deadline to raise tariffs from 10% to 25% that means we are approaching a critical point in the negotiations. This means it is also a critical turning point for the market as well. Expectations have been high but there is significant risk ahead that another quarter could transpire, along with thousands of negative headlines, before a deal is reached. This began to weigh on the market last week.
Even though the major indexes finished with a weekly gain it was miniscule and no reason to get excited. If anything, having the Dow stretch its winning streak to 7-weeks is just one more reason for investors to be cautious because you know there is a real bout of profit taking at some point in our future. It would have been more bullish to give back 200-300 points for the week and have investors believe it was a great buying opportunity.
The S&P traded below 2,700 on both of the last two days but recovered to close over that level. The index is stuck below the confluence of multiple resistance levels with the 200-day at 2,742 the biggest threat. Assuming a lack of bad news over the weekend we could see that level retested next week.
The Dow broke through the cluster of moving averages and was on its way to 25,800 when the weakness began. Now the index is using that prior resistance as support. This is about the right level to rest after trading below 25,000 intraday on Friday. The close was 123 points above the intraday lows and back above resistance. This would be a good spot to launch a new move higher.
The Nasdaq fell back into correction territory intraday and closed exactly on that 7,298 level. Amazon was the big drag on the index with a couple biotech companies leading the winners list. The tech sector rebounded with the chip stocks, but that rally has given up ground the last two days. With the majority of the big tech stocks already reported we are headed into the post earnings depression period.
The Russell posted a minor 4-point gain for the week, but it was a fight. The index traded on both sides of the 100-day average multiple times but lost the battle on Friday. This week and next is small cap earnings and there are rarely any market movers. This is a herd mentality. If they majority do well the index will rise.
With the potential fading for an end of February trade deal, the global economy slowing, Q1 earnings turning negative and a 10% rally since Christmas, there are plenty of reasons to be cautious in the weeks ahead.
Enter passively, exit aggressively!
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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 Position Changes
COST - Costco (Short Put)
We closed the short put at the open on Feb 1st.
Closed Feb $180 short put, entry $2.08, exit .05, +2.03 gain.
CRM - Salesforce.com (Short Put)
We closed this short put at the open on Feb 1st.
Closed Feb $115 short put, entry $2.20, exit .03, +2.17 gain.
SPLK - Splunk (Mar Short Put)
Splunk is a rapidly growing cloud security company that uses AI and machine learnings to allow users to collect, index, search, explore, monitor, correlate, and analyze data regardless of format or source. Shares are making new highs after a rough Q4 .
Earnings February 28th.
Sell short March $115 Put, currently $2.25, stop loss $124.25.
ADBE - Adobe Systems (Mar Short Put)
I play Adobe a lot because they normally have a positive trend and huge option premiums. Shares are right on the verge of a new four month high. I am recommending the $240 put but you could move to the $230 put for a little safer position.
Earnings March 14th.
Sell short Mar $240 Put, currently $3.70, stop loss $249.25.
ADSK - Autodesk (Mar Short Put)
Autodesk is also on the verge of making a new high and we can sell well out of the money for a decent premium. Earnings are at the end of the month so we will have to exit in about three weeks.
Earnings February 28th.
Sell short Mar $135 Put, currently $2.33, stop loss $148.25.
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.
ADBE - Adobe Systems (Feb Short Put 1/17)
Adobe has broken free of the December decline and it moving up briskly. The close on Thursday was the 200-day average and the 100 is only 2 points higher. While those are resistance, a move over those levels should reach $260 or higher.
Earnings March 14th.
Sell short Feb $230 put, currently $2.71, stop loss $238.50.
Update 1/31: No specific news on Adobe but the stock dropped with the Nasdaq on Tuesday to stop us out at $238.50.
Closed Feb $230 short put, entry $2.23, exit $2.52, -.29 loss.
ADSK - Autodesk (Feb Put Spread 1/10)
Autodesk closed at a 4-week high on Wednesday at $137 after a December low of $118. The company had been withstanding the decline rather well until they announced on the 20th that they were acquiring BuildingConnected, a leading construction bid-management platform for $275 million. Buyers almost always decline and while this is probably a good acquisition, there were some naysayers. Shares ahve recovered and premiums are high.
Earnings February 19th.
Sell short Fed $125 put, currently $2.21, stop loss $129.35.
Buy long Feb $115 put, currently $1.11, no stop loss.
Net credit $1.10.
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.
Update 1/3/19: The Apple revenue warning and claims that business declined sharply in China over the last two months, hit Alibaba 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.
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 - SalesForce.com (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.
INTU - Intuit (Feb Short Put 1/10)
Intuit closed at a 4-week high on Thursday after the company announced its shareholder meeting would be on January 17th and would discuss the outlook for the company. This is tax season and Intuit earnings soar as millions of customers order tax forms from the company to use with their Quickbooks software.
Earnings Feb 18th.
Sell short Feb $190 put, currently $2.20, stop loss $198.65.
You could also sell the $190/$180 put spread for an 85 cent credit if you don't want to sell the put.
IWM - Russell 2000 ETF (Mar Put Spread 1/31)
The Russell just broke out over some decent resistance and appears to be starting a new leg higher. The tech rally has lit the fuse and the small caps will begin reporting next week. The Chinese trade deal appears to be progressing and the Fed is on hold for the time being. The "mostly" positive earnings have erased some of the fears about a recession. The market should move up from here, but we still have the slower earnings growth to deal with over the next several weeks. With the breakout, this could be a good spot to put on a low volatility spread.
Sell short Mar $140 Put, currently $1.05, stop loss $144.85.
Buy long Mar $134 Put, currently .55, no stop loss.
Net credit 50 cents.
NFLX - Netflix (Mar Short Put 1/31)
Netflix beat on earnings and posted strong guidance but it was not enough for some traders. Shares have declined from $360 to $340 but they are ticking slowly higher. All the bad news is priced in and with their new price increase the CEO said the cash burn would stop in 2020. By then they will have another 50 million or more subscribers at $10 a month and nearing a total of 200 million. That is $2 billion a month in basic revenue. Shares should move higher from here market permitting
Sell short March $280 Put, currently $2.66, stop loss $317.50.
NVDA - Nvidia (Feb Short Put 1/17)
Nvidia has not been star performer as in the past but it is starting to warm up. Dip buyers have done well but there is a long way to go to recover lost ground. The outlook for the company is great and it suffered with the chip sector on the way down. This company is the future of tomorrow.
Earnings Feb 14th.
Sell short Feb $135 put, currently $3.10, stop loss $145.85.
Update 1/31: We were killed on this position. Nividia announced an earnings warning before the open on Monday and fell $29 in the opening print. This was a massacre. The gap lower caused the stock to open below our stop loss and we were stopped at the open.
Closed Feb $135 short put, entry $2.00, exit $7.00, -4.00 loss.
PANW - Palo Alto networks (Mar Short Put 1/31)
Shares are moving up nicely from the December low and the stock received three upgrades last week. UBS moved from neutral to buy and BMO Capital moved from market perform to outperform. Wedbush upgraded from neutral to outperform and raised the price target from $225 to $265. Analysts believe the continued flurry of cyber attacks will not decline and only get worse over time. The demand for Palo Alto products is only going to grow.
Earnings February 28th.
Sell short March $190 Put, currently $2.54, stop loss $203.85.
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.
STZ - Constellation Brands (Feb Put Spread 1/10)
Shares were crushed for a $22 loss on Wednesday after the company posted weak guidance. They rebounded $9 on Thursday after the CEO appeared on CNBC saying the report was misconstrued and business was great. Guggenheim upgraded from sell to neutral and Goldman upgraded from neutral to buy. I am recommending we sell the dip.
Earnings April 10th.
Sell short Feb $150 put, currently $2.10, stop loss $155.50.
Buy long Feb $140 put, currently .90, no stop loss.
TREE - Lendingtree Inc (Feb Short Put 1/17)
Tree has gone vertical and broken out over the Nov/Dec resistance highs at $264. Shares are competing with Netflix for the biggest gain since Christmas with an $88 move. If it breaks out to a 10-month high over $288.40 there is nothing to hold it back from continuing its gains.
Earnings Feb 21st.
Sell short Feb $240 Put, currently $2.00, stop loss $265.65.
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.