The slow uptrend grind finally overcame bearish resistance and a real breakout appeared.
Every index I follow broke out over multi-month resistance on Wednesday and it would appear the bulls are finally showing up to the party. Volume increased and earnings misses were ignored. Economics improved in Germany, China and the U.S. and miner BHP Billiton (BHP) said there was no sign of steel demand slowing from China. Greece said it expects to have an agreement with the private sector bond holders by this weekend. Good news is breaking out all over and the markets have posted their best January to date since 1987.
Energy stocks are in rally mode as well as semiconductors, materials, financials, techs, etc. The rally has gone from sector specific on a daily basis to broad based. Best of all it did NOT happen on a monster gap higher at the open. After a decent start to the day the indexes showed nice steady progress all day. For a change there was no gap and crap.
I hesitate to jump into a suddenly frothy market but I do like the breakout. I am going to add another play today to our very profitable portfolio. With almost every company reporting earnings in the next two weeks there is not a lot to choose from.
We also have one expiring. The McDermott combination play is going to expire slightly in the money on the put side. We could take a minor loss and just exit the put before expiration but I want to also recover the call premium on the other side of the trade. I believe MDR has found a bottom and support appears to be holding. I am going to recommend we let the put be exercised and take possession of the stock. At $11.50 it is not going to break the bank. With the energy sector improving the odds are pretty good we will see an eventual rebound in MDR and we can recover the roughly $2 we have invested.
Send Jim an email
Current Position Changes
MDR - McDermott (Long Call, Short Put)
The MDR Jan $15 Call is going to expire worthless at a cost of $1.70. The MDR Jan $14 Put will expire about $2 in the money. I recommend we allow the put to be exercised and take possession of the stock.
We will own the stock with a cost of $15.05 with the stock trading at $11.84 today. That cost includes the cost of the call and the premium received on the put. Next week we will sell a February call against the position to further reduce our cost.
Take no action on the MDR combination position.
New Short Put Recommendations
MMR - McMoran Energy (Short Put)
McMoran Energy reported earnings on Tuesday of 16-cents compared to analyst estimates for a -13 cent loss. There was a onetime gain involved of $39 million from settlement of some storm damage claims. MMR realized an average gas price of $3.57 per mcf from its Gulf properties and $111.46 per barrel of oil.
The company also guided significantly higher on production to 155 mmcfe per day from analyst estimates of 128.9 mmcfepd for Q1. McMoran also said those estimates could be raised again once the Davy Jones 1 well currently being completed comes on production in Q1.
Shares of MMR rallied +4% on the news to resistance at $14. As long as oil prices don't implode I believe MMR will punch through that resistance because of anticipation of a gusher when the Davy Jones well comes online.
Do not enter this position unless MMR and the SPX are both positive at the open.
Sell short Feb MMR $12.00 Put, currently 0.76 cents, stop loss $12.95
New Covered Call Recommendations
Long Term Recommendations
New Aggressive Recommendations
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)
LEAP - Leap Wireless (Covered Call)
MCP - MolyCorp (Short Put)
IOC - Interoil Corp (Short Put)
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.