The Dow dropped -247 points at the open but all three of the stocks I recommended on Sunday night were up strongly.

I obviously picked the right stocks to play this week with AKAM +1.64, LULU +3.58 and SINA +10.57 on a very bad day in the markets. Unfortunately we did not officially enter any of those trades since the S&P was never positive.

Some days just don't play out as we expect. The S&P warning on U.S. debt tanked the market and personally I am really surprised the reaction was not worse. S&P did warn there was a 33% chance of a downgrade over the next 2-3 years and not a real downgrade today. However, they changed the outlook to negative from stable and that was a warning shot across the bow. This means lawmakers have got to get serious about cutting spending and quit all the political wrangling and nitpick cuts like canceling $5 billion in unused TARP funds from 2008 and calling it a spending cut like they did last week.

Neither of the budgets from either party has enough spending cuts to get us out of trouble. They will make a big show of the process and there will be more talk of deadlines and government shutdowns but I seriously doubt they are going to take the tough steps to bring us back from the brink. Today's market drop is a sign of what is to come. Not necessarily tomorrow or this week or even in the next couple months but the battle has begun. If the U.S. loses its AAA credit rating there would be trillions of dollars in treasuries that would have to be sold by bond funds, retirement funds and institutions that are prohibited by the rules from owning anything but AAA bonds. Our interest rates would immediately double and it would only get worse from there.

I ventured off the stock-picking track in those prior paragraphs but everyone should know what we are facing. The warning over the rising debt has been increasing in severity for the last couple years but now it has reached the level where it can't be silenced or ignored.

Because of the big gains on those stocks I listed and the instability in the market I am canceling those plays. We need to see how the market reacts to the ratings news on Tuesday and see what happens to Intel and IBM. Then I will try to pick some new targets.

Jim Brown



Current Portfolio


Current positions


Current Position Changes


CTXS - Citrix Systems (Stopped)

The CTXS position was stopped at the open when the stock traded at $72.45. The option was trading at $1.30 at the time.


VMW - VMWare (Closed play)

VMW has earnings on Tuesday so we closed it at the open on Monday with the stock at $84.56 and the option at $1.05.


New Recommendations


None


New Long Term Recommendations


None


New Aggressive Recommendations


None


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.