We don't know if last week's dip is the start of something bigger or a one week wonder. New trades this week could have more risk than normal.

The S&P stubbornly refused to decline and remains in bullish territory over 1280. That could be a last gasp for air before sinking beneath the waves next week but then again maybe not. The economy appears to be strengthening and Europe is wrapping up plans on an even bigger bailout package and plans to buy the debt from countries in trouble. That should solve the debt crisis problem in the short term.

China inflation fears roiled the market last week but I think that is a paper tiger. Any action China takes will require months before it is felt in the global economy. They have to be very careful about weakening the economy too much because they need the rapid growth to keep all their internal programs funded. It is a thin line they have to walk and I seriously doubt they are going to push their economy off the cliff.

I would like to see our markets decline another 3-5% but I have serious doubts it is going to happen. The bullish externals to the market should guarantee a continued uptrend for much of the year. That does not mean straight up but the overall trend should continue higher.

Until we get a decisive dip I am only going to add a couple of plays and one is a spread in order to reduce the risk. I am going to keep the play list small until we find a market direction.

I went through about 500 charts this weekend looking for plays. Most stocks were either heading south at a high rate of speed or they have earnings next week. The FFIV and CREE earnings wiped out the entire chip, networking and cloud computing sectors. The China inflation worry eliminated any mining, metals or materials companies as plays. The coal implosion took out the coal sector and the sharp drop in crude prices on Thursday negated anything in the energy sector. That did not leave much except for the low volatility stocks with options in the 20-50 cent range.

The FFIV earnings drop on Thursday was a good reason why Option Investor never recommends holding a short-term option position over an earnings report. That is especially true of a short position.

I believe that FFIV drop was also a buying opportunity so I am adding them as a play this weekend.

Jim Brown



Current Portfolio


No Open Positions


Current Position Changes


None


New Recommendations


FSLR - First Solar (Short Put)

Going back to the well on FSLR because nearly every other stock I looked at had earnings next week. FSLR earnings are not until Feb-17th.

First Solar was in strong rally mode early last week but caved in to stop us out on Wednesday. That decline appears to have ended but resistance at $148 appears firm. I am going to target a strike right under the Friday low and keep a tight stop while we wait to see if that resistance at $148 can be broken.

Enter trade ONLY if S&P is positive and FSLR is positive.

Sell Short FSLR Feb $135 Put (FSLR11N13500) currently $2.47, stop $142.75

Chart of FSLR


New Long Term Recommendations


None - Waiting for a "real" market dip


New Aggressive Recommendations


FFIV - F5 Networks (Put Spread)

I am looking for a snap back bounce in F5 but it may take a couple days to appear. Investors are afraid of buying the dip before the dip is over. I am going to recommend shorting an April put and buying a short term February put. This way we get the most bang for the buck on the long put side.

I am putting a sell stop trigger on the play so we only enter the trade if the stock is moving up.

Enter trade ONLY if S&P is positive and FFIV trades at $115.

Option prices will decline before entry if FFIV is moving higher.

Sell Short FFIV Apr $130 Put (FFIV11P13000) currently $22.80, no stop, no target

Buy Long FFIV Feb $110 Put (FFIV11N11000) currently $5.30, no stop, no target

Chart of FFIV


January Recommendation History



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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)