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It’s Options Expiration Week

By Jeff Brown on January 17, 2017

We are now in options expiration week for January. And it’s a shorter week than normal due to the market holiday yesterday.

Holiday weekends prior to expiration week are always good for our strategy because they give us an extra day (sometimes two) of time decay and get us even closer to closing out profitable trades. That’s why I decided to hold off on the update until I could see the market action this morning.

It was worth waiting the additional day. As I have been forecasting, we got a big pop this morning in the Volatility Index (VIX), by almost 10% within the first 15 minutes of trading. This has helped our SVXY trade in particular (more on this below).

Now let’s take a look at our spreads…

January Spreads

Jan 2017 $80/$85 bear call spread on Skyworks Solutions (SWKS)

Skyworks has continued to trade within its channel since last October. At $77.32 now, it is near the top of the channel and is likely to pull back within the next two trading days, which is exactly what we want to happen.

The semiconductor company’s earnings announcement is Thursday after market close. And it is entirely dependent upon Apple’s actual production levels for the iPhone. Apple makes up more than 40% of Skyworks’ revenues. Market forecasts for iPhone production have been all over the place… from “normal” to a “substantial increase” to “tepid.”

With this much uncertainty, we do not want to hold the credit spread through expiration, even if it is currently profitable. In the event of a strong earnings announcement (due to higher-than-expected iPhone production), it could turn a perfectly profitable credit spread into a losing position, which we don’t want to happen.

Expect to exit the Skyworks position on Wednesday or Thursday morning. Please keep your eyes open for a close recommendation.

This credit spread is a HOLD. Be on the lookout for a recommendation to close this position.

Jan 2017 $30/$25 bull put spread on VanEck Vectors Junior Gold Miners ETF (GDXJ)

Last week, the ETF, which holds a basket of junior gold exploration and mining companies, stayed put at right around $36 per share. That puts the price 20% above our short strike. We expect this position to expire worthless at the end of the week.

This credit spread is performing as planned and is now a HOLD.

Jan 2017 $100/$105 bear call spread on Caterpillar (CAT)

The global manufacturing powerhouse had another flat trading week last week, which has been great for our position. Earnings are not expected until next week, so I am expecting this credit spread to expire worthless.

The CAT credit spread is a hold.

Jan 2017 $78/$83 bear call spread on SPDR Energy Select Sector ETF (XLE)

Between January 6 and 10, oil finally pulled back… by a bit more than 6%. And that’s been good for us. As expected, there have been doubts that the members of the Organization of the Petroleum Exporting Countries (OPEC) will reduce oil production. The temptation for these countries to maintain production levels is simply too great. The countries want, and in most cases need, the money. The indication of actual production levels pushed down the price of oil during that window.

While oil has since recovered a bit from its drop, XLE is still trading in a downward channel since early December.

This position remains a HOLD.

Jan 2017 $105/$110 bear call spread on the ProShares Short VIX Short-Term Futures ETF (SVXY)

We were encouraged by the price action of SVXY on Friday’s close. The VIX closed lower on the day and so did SVXY. That’s not supposed to happen… SVXY typically trades inversely to the VIX. This price action means traders believe SVXY is overbought and are expecting it to pull back.

This morning brought good news as well.  As we’ve been forecasting, the VIX jumped… almost 10% within the first 15 minutes of trading. This is causing SVXY to drop in a corresponding fashion, it is currently down more than 2% from its high on Friday.

We will look to close out this position within the next 24 hours, ideally at a profit.

The bear call spread on SVXY remains a HOLD. Please be ready for an alert to close out the SVXY credit spread.

February Spreads

Feb 2017 $116/$111 bull put spread on the iShares 20+ Year Treasury Bond ETF (TLT)

Last week was uneventful for the bond market. It looks like the bond market is adjusting to a new level of interest rates and is settling in. That is good for this position, as the price of TLT is 4% above the short strike.

We are moving this position to a hold. TLT has traded exactly where we forecast and is trading strongly above the 50-day moving average.

The TLT bull put spread is now a HOLD.

Feb 2017 $115/$110 bull put spread on the iShares PHLX Semiconductor ETF (SOXX)

SOXX is doing exactly as expected. Last week, it was up 2%, bringing our spread down to $0.27. We’ve already earned 14% on margin on this position.

The SOXX bull put spread is now a HOLD.

Feb 2017 $130/$125 bull put spread on the iShares Russell 2000 ETF (IWM)

IWM continues to trade in the same tight channel from early December. This kind of trading action is perfect for credit spreads. Tight trading ranges and time decay make for profitable trades. That said, I still expect IWM to continue its march upwards over the course of the next couple of weeks.

With the increase in market volatility, there’s a chance you might be able to get into this trade if you haven’t already.

The IWM bull put spread is still a recommended trade if you can receive a net credit of $0.59 or greater.

Regards,

Jeff Brown
Editor, Four Point Trader

P.S. As always, if you have any questions or feedback, please send it to BonnerBetaTest@bonnerandpartners.com.

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