It is Sunday night. Do you know where your futures are?

S&P futures are down -9 points while I am writing this commentary. Worries over potential downgrades in Europe and the continuing lack of an adequate solution for their credit crisis is weighing on the world markets again. China is also lower by -2% on worries about a hard landing. The South Korean Kospi index is down -4% after Kim Jong II died of a heart attack while on a train. There are worries of instability because his heir has not been sufficiently groomed for the job and there could be a power struggle between the son and the uncle. Never a dull moment.

Last week was not kind to us with multiple positions stopped out on the market drop. With investors drawing money out of equity funds and commodity funds at a rate not seen since the August market crash it would appear Santa is going to have a rough sleigh ride this Christmas.

The last couple days of expiration week were uneventful but that trend may not last. If the futures hold the markets will open below support on Monday. The three ratings agencies have almost promised us another country downgrade soon and the markets may continue to be lackluster until that downgrade appears. It is tough to say it is prices in when you don't know who it will be and by how much. Moody's downgraded Belgium by two notches on Friday night. That may just be the tip of the iceberg.

Tech stocks are weak because of the Thailand floods creating a shortage of hard drives and parts. The automobile sector is slowing because those same floods impacted the supply of parts for cars. Banks are weak because of counter party risk out of Europe and because they can be shorted and European banks cannot. Commodities, including oil and the energy sector, are weak because hedge funds and commodity funds are being forced to sell to meet redemptions. Customers seeing paper profits build up all year in gold, silver and oil as well as other commodities are now taking profits on fears of a hard landing in China and a failure in Europe that could cause serious problems with global economics.

I am skeptical about the health of the market for the rest of December because of those reasons I cited above. Currently I expect a dip in early January that will be a buying opportunity. However, further bad news from China or Europe could change that outlook.

With the futures down -9 I am not adding any plays today.

We had two covered calls expire with a full profit on Friday. We had two covered calls that were crushed on Tuesday for losses. Until the market begins to trend higher again I will not be adding any new covered calls.

Jim Brown

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Current Portfolio


Current positions

Current positions


Current Position Changes


SD - Sandridge Energy (Covered Call)

The Sandridge Dec $7 covered call expired worthless on Friday with SD at $6.76. We will not be called so we will sell a new call on SD on the first up day this week. We don't want to sell calls into a down market.

Dec $7 Covered Call @ $1.20, expired for $1.20 gain.


MMR - McMoran Exploration (Covered Call)

The Dec $15 covered call on MMR expired worthless on Friday with MMR at $13.82. We will not be called so we will sell a new call on MMR on the first up day this week. We don't want to sell calls into a down market.

Dec $15 Covered Call @ $1.03, expired for $1.03 gain.


KOG - Kodiak Oil & Gas (Short Put - Stopped)

Kodiak plunged more than 10% on Tuesday/Wednesday when crude oil declined more than $5 in a single day. The stop at $8.45 was hit at 3:PM on Tuesday with the put option trading at $1.80.

Short Jan $10 Put @ $1.40, exit $1.80, -40 cent loss.


GMCR - Green Mountain Coffee (Covered Call)

Green Mountain imploded on Tuesday for a $9 loss on news that K-Cup sales had slowed. Our stop loss was $52.75 and our entry point was $57.50. The premium received was not enough to cover the shortfall on the stock price. Fortunately we did have a stop loss on GMCR or it could have been a lot worse. We just exited a profitable plan on GMCR the prior week after the company defied market weakness to post gains. We gave it all back with this one.

Dec $60 Covered Call @ $2.04, stopped $52.75 / 0.10.
Gain on option premium = +1.94
Loss on stock price = -4.75
Net loss = -$2.81


DWS - DSW Inc (Covered Call)

DSW had a really nice rebound in progress but the market sell off on Tuesday knocked -$4 off the stock price or roughly -10% in one day. Our stop was $46.45 and our entry $48.29.

Jan $48 Covered call @ $48.29 / $2.30, exit $46.45 / 1.85
Gain on option premium = +0.45
Loss on stock price = -1.84
Net loss = -$1.39


New Short Put Recommendations


None


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)

YHOO - Yahoo (Long Term Combo)

PHM - Pulte Homes (LT Leveraged Combo)

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.