Last Sunday I said a bear market rally would really be appreciated next week. Evidently a higher power heard our pleas and provided an outstanding rally.

The week was not all fun and games. At Tuesday's low the S&P was down -5% for the week but the rebound erased that loss and we ended with a +2% gain by Friday. Helping along the way was better than expected economics and a sudden move on the part of Europe to recapitalize their banks and head off another global financial disaster.

The sudden urge to shore up the banks was apparently stimulated by the realization that Greece was a lost cause and they were facing an eventual default. The "hurry up and get Greece some money by October 15th or they will default" turned into "Greece does not need any additional money until mid November." Add to that the sudden about face on recapitalizing the banks by the end of October and it appears there is a plan underway to let Greece default in an orderly manner.

Nobody is saying this in the press but it will be interesting to see how this plays out.

Late news from the Merkel-Sarkozy meeting on Sunday claim they have a plan for "comprehensive, sustainable and rapid response on implementation" by month end. Reportedly they claim they want to end the sovereign debt crisis before the G20 meeting on November 3rd.

Also on Sunday the German news agency DPA is reporting the EU finance ministers are working on a plan to reduce Greece's debt by 60%. That would be a substantial haircut and would require the bank bailout plan to be in place in advance.

Fortunately the urgent action on shoring up the European banks has been a calming influence on the global markets. Futures are up +10 points again on Sunday night. Asian markets are up after China's market had been closed for a week for a national holiday.

After the big declines on Mon/Tue I did not launch any plays mid-week because of the continued high volatility and the worry the sudden rebound would fail. The lack of any material profit taking on Friday suggests investors are losing their fear of falling and are betting on a resolution in Europe, better economics in the U.S. and a decent earnings cycle that starts this week.

Let's hope all those factors do come to pass as expected. I am going to try and sneak in a couple plays for Monday. Let's hope the gap open does not deflate the premiums until we enter the positions.

Jim Brown

Send Jim an email



Current Portfolio


Current positions


Current Position Changes


PRU - Stopped on Tuesday

The PRU play was stopped out on Tuesday when the S&P plunged to 1075 and a -5% decline for the week to date. The option was trading for $2.00 when the stop on PRU at $44.75 was hit. That resulted in a loss on the position of 90-cents.


New Short Put Recommendations


DLTR - Dollar Tree $77.68 (Short Put)

Dollar Tree announced a $1.5 billion share buyback on Friday morning. Most companies buy back shares when they are weak to get the most bang for their buck and support the stock price. DLTR has already spent $345.9 million in shares in 2011. They took some heat on announcing the buyback with shares near a 52-week high but they don't have to buy here. They can buy whenever the stock dips for the rest of the year. This is a support program on an already strong stock.

Obviously nobody can tell if DLTR will continue moving higher but they did ok in a bad market so odds are good they will do ok in a good market as well.

Do not enter this position unless DLTR and the S&P are both positive.

Sell Short Nov $72.50 put, currently $2.00, stop loss $75.50

Chart of Dollar Tree


SHLD - Sears Holding $62.12 (Short Put)

Sears announced terrible earnings, loss of -$1.13 per share, that was nearly twice what analysts expected at -64 cents. However, Bruce Berkowitz fund manager at Fairholme, reiterated his bullishness on the stock. Let's hope so since he owns more than $1.1 billion or 16% of the retailer.

Helping to push analyst expectations higher was an announcement from Sears that they are embarking on a crash program to sell properties, lease space in malls they own and lease space inside existing sears stores to other vendors wishing to partner with Sears to build their brand. I think this is an outstanding move and everyone has been waiting on Sears for years to maximize their real estate. After all they did change the name to "Sears Holdings" because of their massive property holdings not because they are a leading retailer. Many people don't realize Sears owns many of the malls where their stores are located.

Secondly Sears has launched into an effort to capitalize on their brands by licensing them into other stores like Ace Hardware, Costco, etc. I was in my local Ace last week and they now have an entire isle of Craftsman tools. This is a killer opportunity for Sears to maximize their exposure. There are two major brands of tools in the USA. That is Snap-On for the professional and Craftsman for the non-professional. Sears is going to expand this plan by putting other brands they own into other retailers. I believe this will rejuvenate Sears stock in the years to come. Today we are only concerned about the next six weeks but hopefully the buzz will continue.

Do not enter this position unless SHLD and the S&P are both positive.

Sell Short Nov $52.50 put, currently $2.55, stop loss $59.25

Chart of Sears Holdings


New Covered Call Recommendations


None


New Long Term Recommendations


None


New Aggressive Recommendations


WYNN - Wynn Resorts $129.06 (Short Put)

The casinos with exposure to China were crushed last week on worries China's economy may be cooling> I believe this is far from the truth at least for the casino business. WYNN lost -$30 on the news to trade under $110.

Credit Suisse was quick to upgrade WYNN saying they were the premier brand in Macau and had plenty of room left to run. Wynn specializes in the high end of the Macau market and high end players are not as impacted by the "potential" slowing of the Chinese economy.

Do not enter this position unless WYNN and the S&P are both positive.

Sell short Nov $105 Put, currently $4.00, stop loss $119.50

Chart of WYNN


Existing Play Recommendations


Links to original play recommendation

BAC - Bank of America (Long Term)

BAC - Bank of America (Update 8/31)

BZH - Beazer Homes (Long Term)

MDR - McDermott International (Long Term)

BK - Bank of New York Mellon (Long Term)

NVDA - Nvidia (Long Term)

TSCO - Tractor Supply (Short Put)

SD - Sandridge Energy (CC + Long Term Combo)

YHOO - Yahoo (Long Term Combo)

HPQ - Hewlett Packard (Aggressive Short Put)

PHM - Pulte Homes (LT Leveraged Combo)

SLV - Silver ETF (Short Put)

PRU - Prudential (Short Put)


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.