This is expiration week and time has run out. Time to close our driller position.
We have a combination position on Transocean that included a long insurance put with an April strike. I am recommending we close that position at the open on Friday rather than let it expire in the money.
We started this position on expectations that BP, RIG and others involved in the Deepwater Horizon disaster would settle the suit rather than go to trial. Unfortunately when the settlement was announced it was only a partial settlement by BP for $7.8 billion with the thousands of individuals and businesses suing for reimbursement.
The larger suit by the government to determine liability was postponed. The judge has set a date of May 3rd to discuss the potential for going to trial. He wants to know if the parties are closer to a settlement on that portion of the liability or will there be a need to actually schedule the trial again. If the trial start is rescheduled it would probably be within 90 days since all parties were ready a month ago when it was postponed.
I firmly believe Transocean will escape with minimal liability and most of that liability should be indemnified by BP based on the contracts. The judge has ruled against BP on multiple occasions that the indemnity was valid. BP will try to assign blame and prove gross negligence against Transocean in an effort to void the indemnity. Nobody really expects them to succeed but with $25 billion in fines and damages hanging on the outcome they at least have to try.
Meanwhile the drilling sector is heating up. There is a shortage of rigs that could grow to 20% by 2013. Rig rates are rising. Noble Corp (NE) posted strong earnings that rose more than 100% to 47-cents on Thursday compared to analyst estimates of 42-cents. Diamond Offshore (DO) also beat with earnings of $1.21 versus estimates of 99-cents. Transocean does not report until May 3rd.
I am going to recommend we leave the short put side of the play open. The sector appears to be improving and Transocean received good news last week from Brazil when the Chevron trial was moved to another jurisdiction and away from the crusading prosecutor. I am going to put a stop loss on the position just in case.
With market alternating between triple digit up and down days I am not going to add any new plays. Cash is a position.
Send Jim an email
Current Position Changes
BK - Bank of New York (Short Put/Long Call)
Both sides of this position were closed at the open on Monday as recommended in the weekend newsletter.
Closed Long 2013 $20 Call, entry $3.30, @ $4.35, +1.05 gain.
Closed Short 2013 $20 Put, entry $3.90, @ $1.53, +2.37 gain.
YHOO - Yahoo (Closed Long Call)
I should have left the call open because news this week pushed the stock higher. However, we know that earnings can just as easily cause severe drops. I wanted to escape the play without the risk and we did have a small gain.
Closed long YHOO April $14 Call, entry $2.59, currently 0.97, -$1.62 loss.
We previously close the short put side for a $2.04 profit. Net +0.42 gain.
RIG - Transocean Offshore (Close expiring put)
Close expiring April $55 put, entry $1.32, currently $4.75, +3.43 gain.
UGA - US Gasoline ETF (Close Expiring put)
The gasoline ETF has declined in value over the last week because of the decline in oil prices. We are still highly profitable and I expect oil prices to rise on Friday. The WTI futures expire and nobody is going to want to go into the weekend short crude when Israel can attack Iran at any time.
However, the ETF is right on our strike at $55. Close the put at the open to avoid any further decline.
Close Short UGA April $55 Put, entry $2.35, currently $0.50, gain +1.85
New Short Put Recommendations
New Covered Call Recommendations
Long Term Recommendations
New Aggressive Recommendations
Existing Play Recommendations
Links to original play recommendation
BK - Bank of New York Mellon (Long Term)
YHOO - Yahoo (Long Term Combo)
GLD - Gold ETF (Short Put)
EXXI - Energy XXI (LT Covered Call)
UGA - US Gasoline ETF (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.