The markets closed down on Friday but with only a minor weakness except for the Russell 2000.

Most of the indexes were neutral for the week but the Russell 2000 was down -3%. The small cap Russell is normally considered to be a sentiment indicator for the broader market. The smaller stocks have less liquidity and fund managers only want to buy small caps if they are confident about market direction. The same is true in reverse. If they fear the market is done moving higher they will bail from the small caps first because they fear the lower liquidity in a market breakdown will produce higher losses on a quick sale. They are normally content to leave big cap positions open until the last minute to insure they don't miss out on a continued move higher in case they are wrong about direction.

The Russell has traded in a narrow range from roughly 810 to 830 for the last four weeks. That range finally broke on Friday with a lower high on Thursday and now a lower low on Friday. This is negative for market sentiment. Volume on the Russell ETF (IWM) rose to 70 million shares on Thr/Fri compared to about 50 million on an average day. That is not a good sign.

Russell 2000 Chart

The Russell did not breakout to new highs like the big cap indexes. Buying has been rather subdued since early February with a solid resistance top at 830. If this is an indication of a change in fund manager sentiment then we could see a decline to support at 775.

Russell Chart

I am hesitant to add new positions in what could possibly be a change in market direction. Anything is possible and Friday's decline in the Russell could have been just one fund reallocating positions. However, we need to be cautious given the three month rally. We are due for a decent pause.

If Monday turns into a positive day I will send another update on Monday evening. There is never a rush to add to positions. There is always another opportunity as long as we preserve our capital.

Jim Brown

Send Jim an email



Current Portfolio


Current positions

Current positions


Current Position Changes


CRR - Carbo Ceramics (Short Put Stopped)

The Carbo position was stopped out on March 1st when CRR declined to our stop at $88.25. The energy sector had been one of the bright spots in the market but investors have been taking profits for three days despite the spike in crude. This is another indication the market may be getting ready to roll over when traders begin selling stocks in a strong sector.

Unfortunately our long put that was protecting this position expired two weeks ago.

CRR Short Jun $90 Put, entry $8.24, exit $11.20, loss $2.96

Chart of Carbo Ceramics


JEF - Jefferies Group (Close Short Put)

Jefferies has gone vertical and closed at $17.27 on Friday. We entered this trade at $12.85 with a short April $13 put at $2.85 and used the proceeds to buy two April $13 calls. The put has declined to 15-cents and we need to close it before the market retreats. We are highly profitable on the calls.

Buy to close JEF APR $13 Put, entry $2.85, currently 0.15, +2.70 gain. Chart of Jefferies


New Short Put Recommendations


None


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)

SD - SandRidge Energy (Long Term CC)

YHOO - Yahoo (Long Term Combo)

PHM - Pulte Homes (LT Leveraged Combo)

JEF - Jefferies (LT Leveraged Combo)

GLD - Gold ETF (Short Put)

WFC - Wells Fargo (Combination)

CRR - Carbo Ceramics (Short Put)

JJC - Copper ETF (Short Put)

WNR - Western Refining (Covered Call)

EXXI - Energy XXI (LT Covered Call)

RIG - Transocean Offshore (Short Put Spread)

USO - US Oil Fund (Covered Call)

UGA - US Gasoline ETF (Short Put)

MMR - McMoran Exploration (Short Put)


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.