The quarter ends this Friday and fund managers should be in window dressing mode the next couple of days.

I was hoping to get a little bigger post QE3 dip before quarter end but it does not look like that will happen. Monday's decline was neutral because the Monday after a quadruple expiration is typically flat to down as all the settlements hit the tape. Traders who opened their accounts on Monday morning and found stock put to them or stock had been called away typically dump it on Monday and start over. That creates market churn and a lack of direction.

The worries in Europe are returning with Greece and Spain front and center with Greece about to erupt in negativity. The Troika left and the outlook is not good. We won't know for a while but rumors are that Greece has not implemented the reforms called for in the last bailout and they already need another one. This is going to be a repetitive headline risk in the weeks ahead.

In theory the next couple days in the market should see window dressing by fund managers. The market is at the highs and the quarter ends on Friday. It is time to dress up those statements with winners. Thursday and Friday could be weak as other traders try to anticipate which stocks are going to get dumped after quarter end and window undressing begins.

Caterpillar (CAT) warned after the close tonight and declined -2.3%. This is another high profile warning like we have already seen from Intel, FedEx and others and will eventually damage sentiment. We still have two weeks before the real earnings cycle begins and plenty of time for more warnings. Q3 earnings are forecast to be down -3% and the first down quarter since the recession.

QE3 was good for two days of market gains and we have been going sideways ever since. This is consolidation in place and it is a form of window dressing by funds to simply pin the market to the highs until the statement date.

Over the last month, since August 24th there have only been two days of real gains, both short squeezes. The rest of the last five weeks has been a sideways move. No declines of note but also no gains. We may be holding at the highs but there has been no confirmation in the form of follow through from either gain.

S&P Chart

That worries me because of the potential for an October surprise. Don't get me wrong. Investors are buying the shallow dips and that is bullish at this level. However, nobody is chasing prices higher. There is no urgency to buy and every uptick to resistance is quickly sold. Eventually one side will tire of the game and I suspect that will be when the funds begin to restructure their portfolios in October before their Oct 31st fiscal year end. Typically we see lows in October as losers are sold and winners are sacrificed to cover the losses in the losers. Fund managers restructure their portfolios by kicking out those they have held too long and they don't expect to move higher. They tap new plays to freshen up the look in hopes of big gains in the coming year.

I am going to add a few more plays to replace those we dropped last week. I will add/raise stop losses next weekend in case the market rolls over in October we can exit early.

Jim Brown

Send Jim an email



Current Portfolio


Current positions

Current positions


Current Position Changes


CRR - Carbo Ceramics (Short Put - Closed)

We exited the CRR $65 short put play at the open last Tuesday and just in time. Shares of CRR declined -$7 over the rest of the week.

Closed CRR Sept $65 Short Put, entry $2.52, exit 0.30, +$2.22 gain

CRR Chart


CRM - SalesForce.com (Short Put - Closed)

CRM was another play exited at the open on Tuesday and we got out near the top on that one as well. The exit at Tuesday's open was $157.49 and that was almost the high for the week.

Closed CRM Short Nov $120 Put, entry $4.50, exit $1.10, +$3.40 gain

Chart of CRM


EBAY - Ebay Inc (Short Put - Closed)

The Ebay play was closed as suggested at the open on Tuesday.

Closed Ebay Short Oct $42 put, entry $1.09, exit 0.14, +0.95 gain.

Ebay Chart


New Short Put Recommendations


BMRN - Biomarin Pharma (Short Put)

Biomarin is a pharmaceutical company with a lot of drugs in the pipeline. Analysts believe they could see Phase 1 data on Achondroplasia and Phase II data on PEG-PAL over the next several weeks. The data is expected to be positive and we could see a strong bounce in the stock. However, because drug data is always an unknown event that can create big swings in stock prices the option premiums are very high for a reason. Stocks can rise or fall 25% on data announcements.

BMRN has been riding the 100-day average higher for the last two months as support and over the last week it spiked higher on the anticipated drug announcements. If bad news were to hit I think the 100-day average should hold unless it was a real disaster.

Sell short NOV $37 Put, currently $2.70, no stop (avoid whiplash on an announcement)

Chart of BMRN


WLL - Whiting Petroleum (Short Put)

Whiting Petroleum may be up for sale. The stock spiked the prior week on an article suggesting there were four companies interested in bidding for Whiting and its assets in the Bakken shale. Rumors rarely come to pass but this one could have a bit of truth attached to it. Exxon paid $1.6 billion plus a couple of oil fields in Wyoming and Texas for Denbury's Bakken assets last week. There is a land rush underway and those companies with decent acreage positions are definitely targets. Chevron and Occidental are rumored as suitors.

There is risk here because of the expected decline in crude prices over the next several weeks. I am choosing a strike at support so we have some protection in the case of a crude washout. If by chance we get put this stock I plan to write covered calls on it. The acquisition rumor is too persistent to ignore.

Sell short NOV $44 Put, currently $1.55, no stop.

Chart of Whiting


FFIV - F5 Networks (Short Put)

F5 Networks is seeing analyst upgrades nearly every week because Juniper and Cisco have announced they were dropping certain products that F5 is selling. Under the theory that you can't win in every sector so drop the ones where you are getting beaten, the competition to F5 is electing bow out gracefully rather than continue to fight for a progressively smaller profit margin.

F5 rallied strongly the prior week and although it dipped at the open on Monday the rebound was strong. I am going to pick a strike that is $15 OTM just in case this rally begins to fade. Earnings are not until Oct 24th and hopefully we will be out by then.

Sell short FFIV Nov $95 Put, currently $2.61, stop $102.25

Chart of F5 Networks


New Covered Call Recommendations


None


Long Term Recommendations


None


New Aggressive Recommendations


None


Existing Play Recommendations


Links to original play recommendation

EXXI - Energy XXI (LT Covered Call)

RIG - Transocean (Covered Call)

SBUX - Starbucks (Short Put Spread)

FFIV - F5 Networks (Short Put)

BBY - Best Buy (Short Put)

CRR- Carbo Ceramics (Short Put)

EBAY - Ebay Inc (Short Put)

CRM - SalesForce.com (Short Put)

GG - GoldCorp (Short Put)

ADSK - Autodesk (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.