The markets finished higher for the first week of 2012 but can it last?

This week will be full of headlines from Europe and plenty of dissention over the new plan to make a plan to solve the debt crisis. Futures are down -6 late Sunday on a spike in the dollar and continued decline in the euro.

I reported in my Option Investor commentary last week that January has seen a significant decline in 12 of the last 15 years. Last week's rally in the Dow and S&P came at the open on Tuesday and it was a solid fade for the rest of the week. The Nasdaq did manage to close at the high for the week on the strength of money flowing into the assumed safety of the big caps.

If we are going to see a January decline it should begin this week. The economic calendar is light but the European calendar is heavy. You know how that works. The leaders meet and then each gives their own press conference to state their opinion of how it went and to float trial balloons of their new propositions. Sarkozy and Merkel stake out their positions of what they won't agree to and the market tanks.

With the euro in free fall the rising dollar is a heavy weight for stocks and commodities. They can rally at the same time the dollar rises but normally only on strong economic data. That is not likely with the thin economic calendar next week.

This is the start of the Q4 earnings cycle but that calendar is thin as well. Alcoa (AA) is the first Dow component to report after the bell on Monday. They already warned last week they would report some very large charges and miss estimates. Did that warning take the pressure off? Time will tell. If they post less bad earnings than what analysts now expect then maybe the earnings won't drag on the market. However, Alcoa is going to say they are shutting down 12% of their capacity, some permanently, because of falling demand. That should not be good for the economic outlook.

I am hesitant to add many plays until we get the January dip. I do believe that will be a buying opportunity but we need to wait for it.

I did try to find something to play but we are in that earnings holding period where January options expire in a week but we can't play February because everyone reports earnings in the next couple weeks. We obviously don't want to hold over earnings. Even holding a position in one stock can be dangerous if another stock in the same sector has a bad report.

I settled on the SPDR Exploration ETF. With all the acquisition activity in the oil patch the odds of a big decline are slim.

Jim Brown

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Current Portfolio


Current positions

Current positions


Current Position Changes


PANL - Universal Display (Covered Call)

I did not qualify the plays in the last newsletter with the normal "Don't enter unless the S&P and stock are positive." However, I certainly hope that everyone recognized the more than -10% loss at the open on PANL as a non starter. PANL gapped down on a downgrade and should not have been entered as an active play.


SLV - Silver ETF (Long Term Combination Play)

The euro appears to be on a path to parity with the dollar. It closed at a new 16 month low on Friday and opened even lower on Sunday night. The dollar is moving higher as a safe haven play against the problems in Europe. As long as the dollar is moving higher the price of gold and silver will remain under pressure.

Although this was a VERY long term play there is no reason to keep it in the portfolio if it is only going to get worse for possibly a long time before it gets better. I have no doubt the play would eventually be very profitable but we can use the money elsewhere while we wait for the euro to hit bottom. The dollar will eventually lose its luster as the politicians begin their 2012 fiscal posturing and gridlock continues to be the game plan in Washington. Eventually the rising debt and new actions by the Fed will push it lower and precious metals higher. Until then we will use the money elsewhere.

Close Long Jan-14 $35 Call, cost $5.50, current $4.30
Close Short Jan-14 $40 Put, cost $14.60, current +15.05


New Short Put Recommendations


XOP - S&P Exploration SPDR (Short Put)

The Exploration SPDR is an ETF that holds a broad representation of exploration and production companies in the energy sector. There was $5 billion in deal announced last week alone and UBS put out a list this weekend of nine stocks they feel are ripe for immediate acquisition. The companies UBS feels are targets are APC, COG, CLR, EOG, OAS, PXP, RRC, SM and SWN.

Because it is an ETF it won't be as susceptible to earnings misses by a single company. You can play this as a short put or a covered call. The ATM $54 call premium is $3.10 and gives you protection down to about $51. The $50 short put only has a premium of $1.40 but has a smaller risk. I am going with the short put.

I am not going to qualify this entry. If we get a dip at the open on Monday, futures are down -6 now, then the premium will rise but the risk of a major decline in the XOP is still minimal.

Sell short XOP Feb $50 put, currently $1.40, stop $51.75

XOP Chart


New Covered Call 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)

HITK - Hi-Tech Pharma (Covered Call)

SD - Sandridge (Covered Call)

MMR - McMoran (Covered Call)

LEAP - Leap Wireless (Covered Call)


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.