Market sentiment seems to be eroding despite being 4% from record highs.
Intraday volatility is increasing with large swings in both directions and only minor gains at the close. Thursday's volume of 6.32 billion shares was the lowest day of the year. The A/D ratio was positive at 2:1. However, small cap stocks were 4:1 in favor of advancers. While the big cap indexes continue to be held back by the 2,815 resistance on the S&P, the Russell looks like it may try to push through 1,535 and make another run at 1,566.
A solid move by the Russell could stimulate the market and maybe improve the sentiment on the big caps. The constant droning of news from Europe talking about how bad the economy is and how bad it will be if the Brexit turns into a disaster, continues to weigh on our markets.
US treasuries are seeing a flight to quality with the yield on the 10-year falling to 2.389% and a 15-month low. With $10 trillion in European debt trading at negative yields, the US remains the best place to park your cash until the Brexit is over and a trade deal with China is completed.
In theory that would also mean investors parking cash in US equities but the S&P derived 45% of its earnings from overseas operations to there is risk to US earnings. Currently the Q1 forecast is for a -1.9% decline in earnings growth. That is right on the edge of panic levels. When that drops to a 2 handle investors are going to start taking notice. If it falls to a 3 handle it could spark a broad-based flight out of equities. Unfortunately, a CNBC survey is projecting a -3.7% decline in Q1 earnings. If FactSet, Lipper or Refinitiv begin projecting a -3.7% Q1 there will be market pain.
US tech companies have not been this negative on guidance in six years. Twenty-six tech companies have warned and only 13 have raised guidance. That is followed by 16 healthcare companies and 13 consumer companies warning on earnings.
The weak earnings forecasts, a failure to conclude the Chinese trade deal and the risk from Brexit are keeping equities from sustaining a rally.
The S&P has been fighting resistance at 2,815 since mid-October. We are due for a breakout but it may be another week or two until the first earnings reporters begin to confess. This week and next is warnings week. This is when the early Q1 reporters have to warn before they enter their quiet period ahead of earnings.
The Dow is trapped in a lower high pattern and needs to move through 26,000 and 26,191 to generate any real excitement. This would be a good feat without any resolution on China.
I was cautious on recommending new plays this week. I do not trust the market to keep going higher and this intraday volatility stopped us out of some positions last week. I would rather not be stopped next week so I picked some stocks with lower volatility.
I would be careful with longs in this environment. The market cannot maintain a trend and intraday volatility is similar to that seen in market tops and bottoms.
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
UBNT - Ubiquiti Networks (May Short Put)
Shares dipped just enough in the market drop on Monday to stop us out. Premiums spiked on the Nasdaq dip and it was a big loss.
Closed May $120 short put, entry $3.80, exit $5.60, -1.80 loss.
MSFT - Microsoft (May Put Spread)
Shares dipped with the rest of the tech sector and just enough to stop us out on Wednesday. The long side is still open. I considered reopening the short side at the current 88 cents, but the market trend is still negative.
Closed May $105 short put, entry $1.04, exit $1.11, -.07 loss.
Retain May $95 long put, entry .30, currently .28. No stop loss.
CRM - SalesForce.com (May Put Spread)
CRM was hammered after 50 women filed suit against the company saying they built customized apps for prostitution site Backpage.com that allowed pimps and johns to be matched up with them for illicit sex. I have no view on this since it would be a little more personal than suing Microsoft because backpage servers ran Windows software. Customized apps could me a lot of different things to different people. Regardless, shares fell nearly $20 to stop us out.
Closed May $155 short put, entry $2.34, exit $4.00, -1.76 loss.
Retain May $145 long put, entry 1.16, currently $2.51, +1.35 gain. No stop loss.
BIIB - Biogen (May Put Spread)
Shares of Biogen fell 30% after they cancelled a trial for a promising Alzheimer drug. This was six days ago and after a brief attempt at follow through, shares have begun to tick up. I think if they were going to decline again is would have already happened. Biogen is a large company with dozens of drugs in the pipeline. Historically, for every ten drugs that move into the testing phase only one is approved for use. It is a risky business but the rewards were huge. The Alzheimers drug was expected to produce $10-$12 billion a year in revenue. This was a hit but that revenue was not already factored into the stock. The drug would not have gone to market for at least another two years. That means the drop was overdone and sellers should be exhausted.
I am using a wide spread because the margin is cheaper than a simply naked put.
Earnings are April 30th so we will exit early.
Sell short May $210 put, currently $3.20, stop loss $224.85.
Buy long May $195 put, currently $1.40, no stop loss.
Net credit $1.80.
PYPL - Paypal (May Put Spread)
Shares are moving steadily higher without a lot of volatility. There is decent support at $101. This is not a wide spread so margin is minimal. Readers have been asking for some simple, low risk spreads.
Earnings May 1st.
Sell short May $95 put, currently $1.26, stop loss $100.50.
Buy long May $90 put, currently .65, no stop loss,
Net credit 61 cents.
SHOP - Shopify (May Short Put)
Shares peaked on March 14th and have been drifting sideways to slightly lower. Support has formed at $198 and shares gained $3 on Thursday in a choppy market. The stock may be getting ready to take anther run at a new high.
Earnings May 14th.
Sell short May $170 put, currently $3.50, stop loss $194.85.
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.
ADBE - Adobe Systems (May Short Put 3/21)
Last Friday Adobe fell $16 on an earnings disappointment. Shares are rebounding with a $4 gain today. The low in the drop was $252 and shares have already rebounded to $264. We should be able to sell the $245 put with a degree of relative safety.
For those that cannot sell short puts you can turn this into a spread by purchasing the May $235 put, currently $1.96 for a $1.29 credit.
Earnings June 13th.
Sell short May $245 put, currently $3.25, stop loss $255.85.
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.
Update 3/7: 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.
CRM - Salesforce.com (May Put Spread 3/21)
Salesforce.com is another stock that suffered badly after earnings on March 4th. Shares fell from $165 to $150. Over the last two weeks they have completely erased that drop and closed at a new high on Thursday. I wanted to sell a put on it but the premium is not strong enough so I am going to recommend a spread.
Earnings June 3rd.
Sell short May $155 put, currently $2.19, stop loss $160.65.
Buy long May $145 put, currently .94, no stop loss.
Net credit $1.25.
FB - Facebook (May Short Put 3/14)
Facebook shares are chopping around in the $170 range with solid support at $160. They are battling headlines about security and privacy and government intervention. I believe they have government stagnation in their favor. Lawmakers are too concerned about fighting each other than actually passing privacy laws.
Earnings May 1st, must exit before earnings.
Sell short May $150 Put, currently $2.04, stop loss $159.85.
Update 3/21: Facebook had a bad week falling from $174 to $159 on day after day headlines about privacy issues and potential regulator problems. This was before the news on Thursday that Facebook had let employees see hundreds of millions of passwords. Estimates are more than 600 million passwords were stores in plain text without any encryption and accessible by Facebook employees. Early in the week the stock dropped after Facebook was unsuccessful in completely removing the live video posted by the New Zealand shooter. More than 1.5 million clips were deleted but they keep showing back up again from copies saved by users.
3/18: Stopped May $150 Put, entry $2.48, exit $4.19, -1.71 loss.
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.
MSFT - Microsoft (May Put Spread 3/14)
Microsoft is nearing one billion Windows 10 installations and it will not be long before they move to the next version. This is a money printing juggernaut. Shares are about to break out to a new high.
Earnings May 1st. Must exit before earnings.
Sell short May $105 Put, currently $1.13, stop loss $111.85
Buy long May $95 Put, currently .39, no stop loss.
Net credit 74 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.
Update 3/7: 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.
NVDA - Nvidia (May Short Put/Put Spread 3/21)
Nvidia has recovered from the January and early March beatings and has surged to a new 5-month high. Premiums are not as high as I expected, and I am going to recommend a spread. You could sell just the put but your risk will be a little higher.
Earnings May 16th.
Sell short May $155 put, currently $2.73, stop loss $167.25.
Buy long May $145 put, currently $1.53, no stop loss.
Net credit $1.20.
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.
SHOP - Shopify (May Short Put 3/14)
Shopify is on a roll. The prior week decline in a bad market barely dented the rise in the shares and they have sprinted $30 higher in the last five days. One analyst said the price could double.
Earnings May 14th, must exit before earnings.
Sell short May $180 Put, currently $5.50, stop loss $198.85.
Update 3/21: Shopify shares fell $10 at the open on the 19th after Facebook announced the launch of Instagram Checkout which allows users to pay for items without leaving Instagram. Bloomberg said this means shoppers will have an alternate method of payment that does not being consumers into the Shopify platform. Not only will this reduce overall merchandize and payment volume for Shopify but it prevents other opportunities to market Shopify products after the sale.
3/18: Stopped, May $180 short Put, entry $5.80, exit $7.00, -1.20 loss.
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.
TSLA - Tesla Inc (May Put Spread 3/21)
All of the problems being created by Elon Musk has created some serious volatility in Tesla options. The judge gave him one more day to file his response to the SEC assertions that he tweeted restricted information without getting the tweet approved. The range of sanctions could start with another massive fine, some sort of additional restrictions all the way up to removing him as CEO. The option premiums are priced for a complete disaster. I don't think the court will remove him as CEO because it would harm the millions of shareholders. There would be an immediate appeal to void the ruling and it would take months to go to trial. There would likely be a knee jerk reaction but Tesla the company is not likely to go to $150 a share just because Musk continues to act like a spoiled child.
Obviously, this position has risk but only if the stock drops from $274 to $150, almost a 50% haircut overnight. That is not likely to happen. Any minor judgement will erase the put premiums in a heartbeat.
Earnings May 1st. We will exit before earnings.
Sell short May $150 put, currently $2.23, stop loss $245.00. (2-year low)
UBNT - Ubiquiti Networks (May Short Put 3/14)
Major post earnings spike followed by a minor pullback last week with the decline in the Nasdaq. This put is way out of the money and we can put the stop loss just under the low for the week.
Earnings May 10th, must exit before earnings.
Sell short May $120 Put, currently $3.40, stop loss $134.65.
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.