Sunday night and futures are up +10 points. We may have to bite the bullet and buy (sell) something anyway.

I don't have to keep reminding you that selling into an opening gap is not a winning strategy. However, if we keep waiting for a dip this week we could wait all week. The hopium over a resolution to the European debt crisis is getting ridiculous since getting 17 countries to agree on anything is next to impossible.

However, investors appear ready to buy any news and run the markets up like a normal December.

The news this weekend is from Italy where the new government has approved a new budget package with $40.53 billion in austerity measures to "reawaken" the Italian economy and help save the euro currency. The package still has to be approved by both houses of parliament. Steps in the budget include raising the retirement age, increasing the number of years workers need to qualify for retirement, imposing a tax on your primary home, taxes on boats over30 feet and on luxury cars. There are measures to increase employment and give tax breaks to companies that invest to grow their businesses. There is sure to be objections.

Merkel and Sarkozy will meet on Monday to work on their plan they will propose to the EU leaders later in the week. Cracks are already beginning to form so don't hold your breath.

It will definitely be a headline driven week and volatility could be huge. However, I believe market sentiment has changed and any positive news will be celebrated while negative news could be overlooked unless it is a disaster. Sentiment is a funny thing. Sometimes the least likely event can be the cause of a major market move and sometimes the bulls can use daily negative headlines as stepping stones in the wall of worry that must be scaled.

Yahoo is starting to rally again with multiple companies now talking seriously about launching offers. Keep your fingers crossed.

I am going to try and launch a covered call positions since a gap open will inflate the calls and deflate puts. I am also launching a combination play on Jefferies.

Jim Brown

Send Jim an email



Current Portfolio


Current positions


Current Position Changes


GMCR - Green Mountain Coffee (Close Position)

GMCR has rallied to +13 over our entry point and the short Dec $35 put is now only 10-cents and should be closed for a profit of $1.28 on the position. This will probably expire worthless but no reason to leave risk on the table, especially with a stock as volatile as GMCR.

Buy to close, GMCR Dec $35 Put, currently 10-cents, entry $1.38, +1.25 gain


New Short Put Recommendations


None


New Covered Call Recommendations


GMCR - Green Mountain Coffee

Green Mountain is recovering nicely from the mid October dip. It was up the last three trading days and up strongly +2.40 on Friday when the market was resting. I am going to take a chance on this trend continuing and write a near the money covered call with two weeks to go.

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

Buy write GMCR DEC $60 call, currently $1.74, stop loss 52.75

GMCR Chart


New Long Term Recommendations


JEF - Jefferies Group (Combination)

Jefferies was crushed because traders were worried they would be another MF Global. The company made the unorthodox move of disclosing all their positions to convince everyone they did not have a similar risk profile. The rate of acceleration on the rebound is increasing. I think the worst is over and they will continue to improve.

In order to capture this trend I want to sell a put and use the premium to buy a call. That gives us a free position and unlimited upside.

Sell (1) JEF April $13 Put, currently $3.10, Stop $10.95
Buy (2) JEF April $13 Calls, currently $1.75, Stop $10.95

Net cost of this position is 40-cents. The put premium pays for the two calls and we have a leveraged upside position for minimum cost. Any move over $13.40 returns us 2:1.

Jefferies Chart


New Aggressive Recommendations


None


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)

SD - Sandridge Energy (CC + Long Term Combo)

YHOO - Yahoo (Long Term Combo)

PHM - Pulte Homes (LT Leveraged 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.