Investors flush with cash after ten weeks of gains are facing a new reality.
The market has now declined for four consecutive days and there could be more pain ahead. Critical support failed on the Russell and the S&P closed right at critical support at 2,750. The Dow is down more than 600 points from last week's high and the losses are accelerating.
Late Thursday evening China reported a 20.7% decline in February exports compared to expectations for a 4.8% drop. Imports fell -5.2% compared to forecasts for a -1.4% decline. The trade surplus for the month was $4.8 billion and far below the expected $26.38 billion. For comparison the January number was $39.16 billion. Trade has fallen off the proverbial cliff. These are horrendous numbers and the futures are crashing again. This is going to weigh on the trade talks, probably in favor of the U.S. but it will be a cloud over the global economy and the global markets.
The Nikkei is down -1.84% overnight, Shanghai Composite -2.9% and Han Seng -1.5%. The US futures are down -7 and slowly bleeding points.
The Russell 2000 has gone into free fall and next support is 1,500 followed by 1,465. The S&P dipped 10 points under critical support at 2,750 before rebounding back to that level at the close. With the futures sharply negative the cash open is likely to retest 2,740 again.
There is no reason to try and launch new positions at Friday's open. The market is likely to be sharply negative and there is no way to open positions into a gap down market.
The decline stopped us out of our remaining positions and that puts us into cash mode. I advise continued caution until the market finds a bottom.
Enter passively, exit aggressively!
Send Jim an email
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
BABA - Alibaba (Short Put)
Shares fell $7 in a weak market as the outlook for China's economy turns even more negative. Shares fell 4% to stop us out.
Closed Apr $165 short put, entry $2.00, exit $1.46, +.54 gain.
NVDA - Nvidia (Short Put)
Four days of market losses and two days of heavy losses on the Nasdaq pushed the chip sector lower and stopped us out of Nvidia.
Closed Apr $135 short put, entry $3.19, exit $2.01, +.18 gain.
No New 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.
ADBE - Adobe Systems (Mar Put Spread 2/10)
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.
Update 3/5: Adobe declined $12 on Monday to knock us out of the position with a decent gain. There was no specific news, but shares cratered with the market ahead of the SalesForce.com earnings.
Closed Mar $240 Short put, entry $3.56, exit $2.15, +$1.41 gain.
ADSK - Autodesk (Short Put)
Update 3/5: Autodesk snuck up on me. I missed exiting before the earnings on the 28th. According to the newsletter instructions we should always exit the morning before earnings. That exit would have been at $1.00. If you held over and waited for the stop loss to be hit on Friday, the exit would have been 15 cents. I am taking the worst exit to confirm with the newsletter policies.
Closed 3/1 Mar $135 short put, entry $2.27, exit $1.00, +$1.27 gain.
BABA - Alibaba (Short Put 2/20)
Shares are trading right at post earnings resistance highs and could move higher at any time. The trade talks in Washington could have an impact if they conclude successfully. Shares spiked Tuesday after the company said it increased its stake in China International Capital Corp, the top domestic bank in Hong Kong, by 117 million shares. This makes their total stake worth $230.61 million and they are now the second largest shareholder. This suggests they have some longer-term plans for the bank.
Earnings May 1st.
Sell short Apr $155 put, currently $2.30, stop loss $163.25.
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.
Update 3/5: We closed the put spread on March 1st when the premium had evaporated and the Russell momentum slowed.
Closed Mar $140 Short put, entry $1.08, exit .06, +$1.02 gain.
Closed Mar $134 Long put, entry .51, exit .03, -.48 loss.
Net gain 53 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.
Update 3/5: We closed the position on February 20th for a nice gain. Now that shares are weakening we may be able to open a new position in the near future.
Closed Mar $280 Short Put, entry $2.89, exit .25, +$2.64 gain.
NVDA - Nvidia (Short Put 2/20)
Nvidia lowered guidance in late January and shares fell from $160 to $131 overnight. They reported earnings on February 14th that was slightly better than their lowered guidance. Shares rallied back over $160. Analysts believe all the bad news is priced in and shares should rise from here. There may be some post earnings depression, but it will probably be bought by those investors that missed the drop to $131.
Earnings May 16th.
Sell short Apr $135 Put, currently $2.43, stop loss $143.65.
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.
Update 3/5: We closed the position on February 20th for a nice gain. Like Netflix, now that shares are weakening we may be able to open a new position in the near future.
Closed Mar $190 Short put, entry $2.60, exit .04, +$2.56 gain.
SPLK - Splunk (Mar Short Put 2/10)
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.
Update 3/5: Splunk dipped on Feb 21st to stop us out at $131.85. We had a good position in progress but would have been hit anyway five days later.
Closed Mar $115 Short put, entry $2.24, exit $1.72, +.52 gain.
STZ - Constellation Brands (Short Put 2/20)
We just concluded a position on Constellation and the stock still looks like it is headed higher. I have to reach out to an April position to get any premium, but we will close it long before expiration. Earnings are April 10th so we will be out well before then.
Earnings April 10th.
Sell short Apr $160 Put, currently $2.15, stop loss $170.85.
Update 3/5: Constellation issued some weak guidance on the 20th and shares collapsed $12 at 3:PM in the afternoon to stop us out.
Closed Apr $160 Short put, entry $2.40, exit $2.34, +0.06 gain.
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.