With the Fed as a trading partner I think it is time to become a little more aggressive.

Time to take the gloves off and start increasing the size and complexity of our bets. The Fed's QE2 program should guarantee the market will have an upward trajectory for at least the next four to six months. That does not mean there won't be bouts of profit taking but the trend should continue higher.

In fact I would love to see a big bout of profit taking starting first thing Monday morning. That would lure in the shorts and set them up for another monster squeeze when the bulls bought the dip again.

The plays I added this weekend contain strikes that are well out of the money in hopes of avoiding any immediate dips. If they come we will deal with them and move on.

I added a couple index plays using January strikes. I chose neutral strikes under resistance that even a new trader could feel comfortable selling.

Later this week I am going to begin profiling what I am going to call an "Aggressive Portfolio" in addition to the normal plays and a few index plays.

The aggressive plays will be at the money or in some cases deep in the money on strong momentum stocks, special situation stocks and story stocks. We want to capitalize on the news events and the stocks that are hot. The length of the plays will normally be longer and may sometimes include LEAPS.

For those of you who have been reading Option Investor for the last decade you may remember that deep in the money puts is my favorite strategy. I wrote quite a bit about the strategy back in the dot.com bubble days. Here is a sample Options 101 I wrote back in November 2000. LINK

Readers should really spend some time going back through the Options 101 and Traders Corner articles when they have time. We have been doing 2-4 educational articles per week since 1999. By rough count that is about 1,700 articles and they are all online for subscribers to read.

I plan on writing a new article describing the aggressive put concept and the risk in the coming days.

Most people don't realize that the risk from writing an at-the-money put and a deep-in-the-money put are exactly the same.

Look for the aggressive portfolio description and initial plays later this week.

SalesForce.com opened at $114.80 with the option bid at 63-cents before continuing lower as the day progressed. Fortunately we were able to exit that position for a profit to close out the October portfolio.

I had really mixed feelings about adding new plays this weekend but waiting for a pullback could be a frustrating experience.

Jim Brown



Current Portfolio




Current Position Changes


None


New Recommendations


DECK - Deckers Outdoor $62.63

Deckers garnered an upgrade from Barclays to overweight on Friday. That came on top of news on Thursday of S&P moving them from the SmallCap 600 to the MidCap 400 index at the close of business on November 10th. This pushed DECK to a $3.73 gain on Friday.

I am worried some of that gain may erode so I am recommending the $55 put. The inclusion into the madcap index should provide support.

Enter this position ONLY if the S&P and DECK are positive.

Sell DECK DEC $55 Put (DECK10X5500) currently $1.05, Stop $59.50

Chart of DECK


PCP - Precision Cast Parts $145

PCP is on a mission and since earnings were released that mission has been to add dollars to its stock price. PCP produces many of the parts in the 787 Dreamliner as well as other planes, cars and machinery of all types. PCP has been catching upgrades almost weekly on increasing business and decreasing debt.

I am picking a strike $10 under the current price and just under support.

Enter this position ONLY if the S&P and PCP are positive.

Sell PCP DEC $135 Put (PCP10X13500) currently $1.50, stop $141.75

Chart of PCP


WLT - Walter Energy $95.85

Walter blasted off last week despite missing earnings estimates by a couple cents. The republican win means that cap and tax is dead for another two years and coal demand will continue to rise.

Also helping the performance was a +106% increase in sales of coking coal driven by higher demand for steel.

Enter this position ONLY if the S&P and WLT are positive.

Sell WLT DEC $85 Put (WLT10X8500) currently $1.58, stop $91.00

Chart of WLT


NTAP - Netapp $55.09

Netapp's chart has been moving from the lower left to the upper right for quite a while and Thursday's market rally added $2 to that chain of gains.

Even though NTAP has been moving progressively higher it has been at a moderate pace and the trend could continue.

Earnings are Nov-17th so we need to be out of this play before that happens.

The $50 strike is 10% below the current price so it would take a serious decline to cause trouble.

Enter this position ONLY if the S&P and NTAP are positive.

Sell NTAP DEC $50 Put (NTAP10X5000) currently $1.09, stop $52.50

Chart of NTAP


Long Term Recommendations


IWM - Russell 2000 Index ETF - $73.75

The Russell 2000 broke out last week after spending the prior three weeks resting on support at 700. That equates to 70 on the IWM. The odds are very good the Russell will continue higher through year-end and never retest that support again this year.

I am picking the $70 strike because of its relative safety. More aggressive traders may want to target the $73 strike or even the $75 strike.

Ideally we would like the market to decline at the open on Monday to inflate premiums and give us a better entry so there is no entry restriction on this position.

Sell IWM Jan $70 Put (IWM11M7000) currently $1.94, stop $72.50

Chart of IWM


SPY - S&P-500 SPDR - $122.72

The S&P-500 is expected to reach 1275 to 1300 by year-end. With it at 1225 today that does not seem like a real stretch. I am only concerned about the +40 point gain from last week eroding before the next leg up begins. For that reason I am recommending the $118 strike (1180) as a relatively safe play. We will stop out well before the S&P declines to that level but there is still some decent premium.

I would personally like to go with a 125 or even 130 strike and roll the dice for a bigger gain but I will save that for the aggressive portfolio next week. The risk is exactly the same only the reward is different.

Ideally we would like the market to decline at the open on Monday to inflate premiums and give us a better entry so there is no entry restriction on this position.

Sell SPY Jan $118 Put (SPY11M11800) currently $2.46. Stop 121.25

Chart of SPY


Aggressive Recommendations


Coming later this week!


October Recommendation History



Options Writer has been profitable for 11 of the last 15 months

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Margin Requirements:

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.