It was a volatile week in the markets but a successful week for our existing plays.

We have three covered call plays that should be called away for a nice gain on Friday assuming the market does not self destruct before Friday. Those are SD< GMCR and MMR.

The GMCR put was closed on Monday for a nickel but we should not have been worried with GMCR holding close to $60.

The equity markets rebounded on Friday from what seemed to be a date with disaster at Thursday's close. The plan to make a new plan in Europe apparently pacified those investors who were afraid the euro zone was going to self destruct. I am not convinced because the plan is long on positive ideas and short on hard details. It may be a little harder to get EU leaders to actually sign it once it has teeth. There will be a another summit to end all summits in March.

Meanwhile the equity markets are faced with a breakeven year. The Dow is up +5% but the Nasdaq and S&P are slightly negative for the year. The Russell is down -5%. Fund managers have had a horrible year and many are down in double digits. They will be racing to try and salvage some kind of performance in the two weeks left in 2011. How they will do that is anybody's guess.

Futures are down slightly tonight. The euro is falling and dollar rising so commodities like gold, silver and oil are declining. If the trend continues we could see a negative open.

I believe market sentiment is currently bullish but we need to see what happens on Monday to prove that theory. The S&P has strong resistance at 1265 and nothing to really push us over that level.

The Fed meets on Tuesday and is not expected to announce any changes. Still, the threat of the unknown could keep the markets in check until after the announcement. The recent flurry of earnings warnings could also provide a deterrent to further gains.

However, because this is December and there are year end bonuses and retirement contributions to put to work the market normally finds a way to move higher.

There is a lot of uncertainty and I am reluctant to add new plays. I am also reluctant to not add plays because a breakout could catch fire on short covering and price chasing into year end.

Jim Brown

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Current Portfolio


Current positions


Current Position Changes


GMCR - Green Mountain Coffee (Closed Position)

The position was closed on Monday as recommended for 5-cents.

Closed, GMCR Dec $35 Put @ 5-cents, entry $1.38, +1.33 gain


New Short Put Recommendations


KOG - Kodiak Oil & Gas (Short Put)

Kodiak is a small oil and gas producer in the shale exploration sector. It recently acquired some additional acreage and producing wells. It is a strong takeover target with a market cap of only $2 billion. This is pocket change to any potential acquirer. The company has a good track record and strong chart.

I am recommending we sell the January $10 put with the stock just over $9. The premium is $1.30 and only a small gain in the stock puts us out of the money. An alternate play would be to sell the $10 covered call for about the same risk/reward.

Do not enter this position unless the S&P and KOG are positive before 10:AM.

Sell KOG Jan $10 Put, currently $1.30, stop loss $8.45

Chart of KOG


New Covered Call Recommendations


DSW - DSW Inc (Covered Call)

DSW operates 327 shoe stores in 40 states. After a hiccup in mid November the chart is showing a steady gain and we are in the retail season. Option premiums are decent for DSW and although resistance is $50 I believe DSW will trade over that level.

I am recommending we sell the Jan $50 covered call for $1.75 with the stock at $48.65. if called we would also gain $1.35 in stock appreciation. With the high call premium we have some downside protection to just below $47.

Do not enter this position unless the S&P and DSW are positive before 10:AM.

Buy-Write DSW Jan $50 Covered Call, currently $48.65/$1.75, stop loss $46.45

Chart of DSW


New Long Term Recommendations


None


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)

GMCR - Green Mountain (Short Put)

MMR - McMoran (Covered Call)

GMCR - Green Mountain (Covered Call)

JEF - Jefferies (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.