For the last several weeks the market has looked toppy and that top finally appeared.
After struggling for two weeks to make minor new highs on low volume the feared event finally came to pass. Investors were nervous about buying a market top just before a sell the news event appeared on the China trade talks. Obviously for good reason.
I have warned for weeks in the Option Investor commentaries that even if the talks concluded with a deal the market was likely to decline. The instant it was released the press would start picking it apart and investors would take profits ahead of the sell in May cycle.
I wrote multiple time when the news flow went dormant that we could be setting up for a disaster where there was no deal and China was hit with another round of tariffs. While we have not gotten to the "no deal" part yet, the 25% tariffs on hundreds of billions of Chinese goods, go into effect on Friday.
Reportedly the Chinese changed their mind on about 50 pages of previously agreed points. Multiple analysts theorized they saw the strong showing in the polls by Joe Biden and decided to drag out the negotiations as long as possible in hoped President Trump would be forced to sign any deal to lift his campaign out of the headline swamp created by the Mueller report.
While we may never know what caused them to change positions, it is going to be painful for China and for investors. President Trump is not going to cave into pressure because he views this as a strong campaign topic. He ran on the "China has been taking advantage of us for decades" point and he can run all the way into 2020 and it is not going to change. He will either win a trade deal or he will be seen by his base as doing battle to save US jobs.
Unfortunately, the market is crashing hard. The S&P futures are down -17 points as I type this because China warned tonight that they will retaliate in multiple ways if Trump goes ahead with tariffs on Friday. The press is going crazy trying to figure out how China might retaliate since they do not buy that much stuff from us.
Analysts are worried this could turn into a long-term trade war because President Trump and President Xi are both strong willed and neither wants to be seen conceding in the battle.
The indexes have rolled over and are now testing critical support. One more big decline could cause some significant technical selling.
Obviously, the market crash caused us to be stopped on all of our put spreads. The call spreads are doing fine but the premiums are not declining because the VIX rebounded to 20.
With the S&P futures down -19, I am not recommending any new positions.
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
NVDA - Nvidia (May Put Spread)
We closed the long put at the open on Thursday after being stopped on the short put.
Closed May $145 long put, entry $1.54, exit .20, -1.34 loss.
Previously closed May $155 short put, entry $3.00, exit $1.59, +1.41 gain.
ADBE - Adobe Systems (May Short Put)
We closed the short put at the open on Thursday.
Closed May $245 short put, entry $3.48, exit .90, +$2.58 gain.
PYPL - Paypal (May Put Spread)
We closed the short side at the open last Thursday. The long side is still open but worthless.
Closed May $95 short put, entry $1.24, exit .18, +$1.06 gain.
Retain May $90 long put, entry .65, currently .06, -.59 loss.
ADSK - Autodesk (June Put Spread)
The market crash caused ADSK to break below support to stop the short side of the put spread.
Closed Jun $155 short put, entry $2.15, exit $3.15, -1.00 loss.
Retain May $140 long put, entry $1.95, currently $1.33, stop loss $172.95.
CRM - Salesforce.com (June Put Spread)
The market crash caused CRM to break below initial support to stop the short side of the put spread.
Closed June $145, short put, entry $1.94, exit $2.28, -.34 loss.
Retain June $130 long put, entry .91, currently .94, stop loss $158.25.
FIVE - Five Below (June Put Spread)
Shares rolled over in a weak market to stop us on the short put.
Closed Jun $130 short put, entry $3.11, exit $4.50, -1.39 loss.
Retain June $120 long put, entry $1.65, currently $2.20, stop loss $140.65.
URI - United Rentals (June Put Spread)
Shares of URI rolled over in a weak market to fall back below prior resistance and stop us out of the short put.
Closed June $130 short put, entry $2.40, exit $4.23, -1.83 loss.
Retain June $120 long put, entry $1.60, currently $1.90, stop loss $136.05.
No New Plays
With the market in crash mode and the S&P futures down -19 on Wednesday evening there is no way to safely enter new positions in either direction.
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 (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 (June Put Spread 4/24)
Autodesk broke out to a new high after a short dip in mid April. All the commentary is positive and Mizuho initiated coverage with a buy rating and $200 price target. It has had a good run but companies making new highs tend to keep making new highs.
Earnings May 30th. We will close before earnings.
Sell short June $155 Put, currently $2.94, stop loss $169.85.
Buy long June $140 Put, currently $1.33, no stop loss.
Net credit $1.61.
BIIB - Biogen (May Put Spread 3/28)
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.
Update 4/24: Biotech and drug stocks have been crashing for the last two weeks on the Medicare for All proposals. This knocked us out of the short put on the 18th.
Closed May $210 Short Put, entry $2.88, exit $3.20, -.32 loss.
Close May $195 long put, entry .79, currently .40, -.39 loss.
Update 5/1: We closed the remaining long put last Thursday at the open after Biogen rolled over and began heading towards support in the biotech crash. Unfortunately, Biogen spiked at the open so we lost the buildup in the put premium.
Closed May $195 long put, entry .79, exit .10, -.69 loss.
Previously closed: May $210 short put, entry $2.88, exit $3.20, -.32 loss.
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.
Update 3/28: 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.
Update 4/24: Salesforce rebounded sharply after the prior week dip and stopped us out of the long put side of the spread.
Closed May $145 long put, entry $1.16, exit $2.06, +.90 gain.
Previously closed May $155 short put, entry $2.24, exit $4.00, -1.70 loss.
Net loss 80 cents.
CRM - SalesForce.com (June Put Spread 4/24)
We were closed out of our last position in CRM but I am going to try it again. Option premiums are high and there is strong support around $155 on the last three drops. At this point all the bad news should be prices into the stock. Shares spiked last week on news they bought SalesForce.org, a related company and SalesForce Investments. Basically, the parent company is reducing its complexity of having a handful of related businesses and instead fold them into the parent. SalesForce.org sold CRM services to schools, hospitals and non profits.
Earnings June 3rd. We will close before earnings.
Sell short June $145 Put, currently $2.73, stop loss $155.25
Buy long June $130 Put, currently 87 cents, no stop loss.
Net credit $1.86.
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.
FIVE - Five Below (June Put Spread 4/24)
FIVE is on a rocket ride to new highs. Analysts are falling all over themselves to upgrade it with higher price targets. We know this vertical ramp will not last forever but it is not showing any signs of slowing. I am hoping that is what it will do. We will finally see a top and then a sideways consolidation phase while the market decides where it wants to go for the summer.
Earnings June 26th.
Sell short June $130 Put, currently $3.00, stop loss $138.85.
Buy long June $120 Put, currently $1.50, no stop loss.
Net credit $1,50.
FL - Footlocker (June Call Spread 5/1)
Shares are heading lower at a high rate of speed. Basketball is about over and the court shoe selling season goes with it. When the big name players are not on TV every week, the enthusiasm for high dollar shoes fades. Shares closed at a 3-month low on Wednesday.
Earnings May 24th. We will exit before earnings.
Sell short June $62.50 call, currently $1.45, stop loss $60.25.
Buy long June $70 call, currently .40, no stop loss.
Net credit $1.05.
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.
Update 3/28: 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.
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.
PYPL - Paypal (May Put Spread 3/28)
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 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.
SHOP - Shopify (May Short Put 3/28)
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 another run at a new high.
Earnings May 14th.
Sell short May $170 put, currently $3.50, stop loss $194.85.
Update 4/24: For the second time in two weeks we were stopped out of a SHOP position. The stock has become volatile at the top of its recent run.
Closed May $170 short put, entry $3.70, exit $4.20, -.50 loss.
THO - Thor Industries (June Call Spread 5/1)
Thor posted a big miss on earnings and the rise in gasoline prices are going to weaken Q2/Q3 as well. Shares closed at a three-week low post earnings and are falling sharply. There is no excitement in the stock in a environment with high fuel costs.
Earnings June 5th.
Sell short June $70 call, currently $1.70, stop loss $68.15.
Buy long June $80 call, currently 30 cents. No stop loss.
Net credit $1.40.
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)
Update 5/1: We closed the short put on Tesla at the open on Thursday. While I doubt it would have ever had a chance of being in the money, shares have dropped nearly $40 since we entered the position.
Closed May $150 short put, entry $2.42, exit .52, +1.90 gain.
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.
Update 3/28: 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.
URI - United Rentals (June Put Spread 4/24)
United posted earnings of $3.31 that beat estimates for $3.03. Revenue of $2.1 billion was also a beat. The company said we are about to enter our "busy season with the strongest service offering in our history, given the strategic investments we have made in our business, including acquisitions, to best support our customers." Shares spiked $12 and are still moving higher a week later after breaking over resistance at $137.
Sell short June $130 Put, currently $2.50, stop loss $134.50.
Buy long June $120 Put, currently $1.15, no stop loss.
Net credit $1.35.
WSM - Williams-Sonoma (June Call Spread 5/1)
The retailer closed at a two month low and appears headed to retest support at $50. Shares rose on an earnings beat but quickly rolled over and the stock and sector are moving lower.
Earnings June 16th.
Sell short June $60 Call, currently $1.10, stop loss $57.50.
Buy long June $65 Call, currently $.40, no stop loss.
Net credit 70 cents.
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.