Our Mondays recently have been pretty grim. Here it is Sunday night and the futures are down -20 and Greece is circling the drain once again.

Talks with EU finance ministers over the weekend ended with no progress and a warning to Greece there would be no further financial aid unless the country can meet its savings targets that were previously agreed. Without any further funds Greece will run out of money in the next few weeks and will be forced to default.

Greek Prime Minister George Papandreou canceled a trip to the U.S. to stay home and chair emergency meetings of the Greek government.

Gold spiked to $1832 despite a sharp rise in the dollar and collapse in the Euro. Crude prices are trading under $87 in the U.S. and $111 in Europe on worries of contagion if Greece is forced into a default. Analysts worry that once Greece is able to restructure its debt through a default the other PIIGS countries will also want to take the easy way out.

Germany is set to vote on the new EFSF bailout fund on Friday but Chancellor Merkel suffered a serious defeat at the polls this weekend as citizens wary of future loans to weaker nations voted against Merkel's party and weakened her coalition. That makes the Friday vote very critical and it may not pass. Without the passage the EFSF will fail.

That means our markets are going to be hostage to another week of geopolitical headlines and after a +5% gain over the last five days we were due for a rest anyway. It appears that rest will begin on Monday.

The events in Europe could push the Federal Reserve to take stronger action when it meets this week. The announcement will be on Wednesday. If by chance the Fed does not implement a new policy we could get a serious sell the news event there as well.

With the potential for market volatility next week I am not going to add any short term plays. I am only adding one long term play as an acquisition target and as a covered call. I would like to build up a small portfolio of free trades that will allow us to capitalize on the long term trend and possibly see some additional winners like Global last week.

I received an email from a reader:

Jim, Great call on GLBL. That will pay my subscription for the rest of my life + lot of profit left over. Bill

I am really glad to hear that but I have one comment for everybody else. Position size is important. These are speculative plays. While I am trying to craft some limited risk positions there is always risk! Don't leverage up so much that a sudden negative event can break the bank.

Jim Brown

Send Jim an email



Current Portfolio


Current positions


Current Position Changes


VIX - Volatility Index ($45 Short Call)

The VIX call expires on Tuesday and I was hoping we could just let it ride but this continuing problem in Europe is giving me heartburn. The high on Friday was 20-cents and the low 6-cents. The VIX closed at 31 on Friday but Monday is going to see a sharp move higher at the open.

Rather than say "close at the open" and risk losing a large portion of our gains I am going to recommend putting in a limit buy at 20-cents. If we can get filled then we exit. If not then we hold our breath the VIX does not move over 45 by Tuesday. With only one day left on the options we should be able to close without any problem. The VIX would have to rally more than ten points at Monday's open to put us at risk. Those premiums are going to be very skinny with only one day left.

Buy to close VIX Sept $45 Call @ 20-cents or less. Currently 20-cents.

VIX Chart


New Short Put Recommendations


None


New Covered Call Recommendations


SD - Sandridge Energy (Covered Call)

Sandridge Energy is a very active exploration and production company operating in the various oil and gas shale plays in the USA. The company has proved reserves of 1,312 Bcfe of which 48% is oil. It owns 3,373 producing wells and 1,720,909 acres under lease. It currently operates 30 rigs and expects to triple production over the next three years.

A company with this big a footprint and a million acres of undrilled reserves is a very tempting target for an acquisition. With a market cap of only $3 billion it would be very easy for almost any of the larger companies to acquire it without much effort.

I am recommending this as a long term combination play as well. Choose your risk/reward level.

Buy Write December $7 Call, currently $1.35, stop loss $6.25 on SD.

Chart of SD


New Long Term Recommendations


SD - Sandridge Energy (Combination)

Sandridge Energy is a very active exploration and production company operating in the various oil and gas shale plays in the USA. The company has proved reserves of 1,312 Bcfe of which 48% is oil. It owns 3,373 producing wells and 1,720,909 acres under lease. It currently operates 30 rigs and expects to triple production over the next three years.

A company with this big a footprint and a million acres of undrilled reserves is a very tempting target for an acquisition. With a market cap of only $3 billion it would be very easy for almost any of the larger companies to acquire it without much effort.

This is an appreciation/acquisition play. We want to get into the play as cheap as possible then ignore it until lightning strikes. If no acquisition appears I still expect them to rise significantly as their production increases.

I am recommending we sell the Jan 2013 $7.50 Put, currently $2.35 and buy the Jan 2013 $7.50 Call, currently $2.52. If we get a sharp decline at the open on Monday we should be able to get a breakeven entry with the put rising and the call declining. Wait until after the open to put in your order. Let the market maker adjust the prices before we hit him with a bunch of orders. There is plenty of open interest at these strikes so there should be volume.

Sell short SD Jan 2013 $7.50 put, currently $2.35, no stop, no target.
Buy long SD Jan 2013 $7.50 Call, currently $2.52, no stop, no target.

Chart of SD


New Aggressive Recommendations


None


Existing Play Recommendations


Links to original play recommendation

COG - Cabot Oil & Gas (Short Put)

VIX - Volatility Index (Naked Call)

BAC - Bank of America (Long Term)

BAC - Bank of America (Update 8/31)

DRC - Dresser Rand (Long Term)

WLT - Walter Energy (Long Term)

BZH - Beazer Homes (Long Term)

MDR - McDermott International (Long Term)

BK - Bank of New York Mellon (Long Term)

GLBL - Global Industries (Long Term)

NVDA - Nvidia (Long Term)

CAT - Caterpillar (Short Put)

TSCO - Tractor Supply (Short Put)

IWM - Russell ETF (Aggressive Combo)


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.