The VIX hit a five year low on Friday at 13.66 and option premiums have shrunk to multiyear lows as well.
It was very tough to find any favorable risk-reward opportunities this weekend. With the VIX so low and the market setting new highs the available option premiums were negligible. I can't tell you how many possible plays I looked at but the premiums were in the low double digit cents. I can't rationalize taking on dollars of risk with only pennies of gain.
Fortunately we had a good March expiration cycle and our long term plays are doing very well. The shrinkage of premium is benefitting us on those existing plays.
I also had a family medical emergency on Sunday and my daughter is in intensive care so this commentary is going to be very short.
Send Jim an email
Current Position Changes
GMCR - Green Mountain Coffee (Closed)
GMCR has not shown any signs of a sustainable rebound. I recommended we close this play at the open on Friday while there is still a minor profit and not wait for it to turn against us.
Closed short GMCR Apr $45 Put, Entry $1.66 Exit $1.28, gain +.38
RIG - Transocean Offshore (closed spread)
Transocean finally gapped up again on Friday to open at $58.19 and well over our short strike price at $57.50. It was a miraculous recovery over the last seven days and we ended up getting to keep almost the entire premium we sold.
The Long March $47.50 insurance put expired worthless. -$3.99 loss
The Short March $57.50 put opened at $0.29, entry $7.50, +7.21 gain.
Net gain +$3.22
MMR - McMoran Exploration (Position Closed)
I recommended we close this play at the open on Friday. This was a play on expectations MMR would announce the initial production results of the Davy Jones 1 ultradeep well in the shallow water gulf. They are about three months past their initial completion date due to various problems in the completion process. They continue to say they expect to complete before the end of March. However, the complete lack of any meaningful news is troubling. Our $13 insurance put expires on Friday and that would leave us uncovered on the short side of the position.
Closed MMR Short April $15 Put, entry $1.92, exit $3.05, loss -1.13
Closed MMR Long March $13 Put, entry 0.33, exit 0.12, loss -0.21
MDR - McDermott (Covered Call Expire)
The March $14 covered call on McDermott expired worthless with MDR at $13.45 at Friday's close. We will lower our cost on MDR shares by 82-cents to 13.23. I had planned to write a new call on Monday but the stock chart is weakening and I am going to recommend selling MDR shares instead.
Short March $14 Call @ 82-cents, expired for 82-cent gain.
USO - US Oil Fund (Covered Call Called)
The March $41 covered call finished in the money at $41.03 and should be exercised on Monday. Our cost in the stock was $40.13 minus the 85-cent premium or $39.28. Called at $41 gives us a profit of $1.72.
Short March $41 Call @ 86-cents, should be exercised on Monday for $1.72 gain.
WNR - Western Refining (Covered Call Called)
The March $18 covered call should be exercised on Monday with WNR at $20.01 and the position will be called away for a +$1.22 gain.
Short March $18 call @ 0.95, WNR @ $17.73 +.27, = $1.22 gain.
New Short Put Recommendations
RVBD - Riverbed Technology (Short Put)
RVBD is a network technology company specializing in LAN/WAN applications. Their stock took a hit in early March to find support at the 100-day average at $26.50. The selling appears to be over and it is trying to rebound back over $28.
Do not enter this position unless RVBD and the S&P are both positive at the open.
Sell short RVBD April $26 Put, currently $1.01, Stop $26.35
Chart of RVBD
TEX - Terex Corp (Short Put)
Terex Corporation manufactures capital goods machinery products worldwide. Its Aerial Work Platforms segment offers portable material lifts, portable aerial work platforms, trailer-mounted articulating booms and light towers, self-propelled articulating and telescopic booms, scissor lifts, telehandlers, and bridge inspection and utility equipment under the Terex and Genie brands.
TEX also sold off hard in early March to just under $22 but has rallied back to resistance at $26. If the market remains positive we should see that level broken.
Do not enter this position unless TEX and the S&P are positive at the open on Monday.
Sell short April TEX $25 Put, currently $1.15, stop loss $24.75
Yes, the stop is under the strike.
New Covered Call Recommendations
MDR - McDermott International
When the MDR covered call expired out of the money on Friday I had planned to write another call on MDR on Monday. After looking at the chart today I am going to recommend we sell the MDR shares instead. The close on Friday was a two week low and there is no life in the stock.
Sell MDR shares, Adjusted cost = $13.23, currently $13.42. Breakeven.
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)
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)
BNO - US Brent ETF (Short Put)
ATHN - AthenaHealth (LT Short Put)
GMCR - Green Mountain (Short Put)
RIG - Transocean (Short Put Spread)
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.