This is the toughest time of the month for selling options.
When we sell options we want to know there is a decent trend in place and volatility on that particular stock will be minimal. Unfortunately we headed into the Q3 earnings cycle and the majority of the S&P reports earnings over the next three weeks. That will produce volatility in the individual stocks and in the sector.
It is not enough to find a potential candidate with earnings the following month but you have to pay attention to when other stocks in their sector report. It is a daunting task.
Complicating the task this week is the low volatility. My charting program (Qcharts) automatically scales the price to the chart across whatever time frame I am viewing. I prefer to see the daily chart and the 30 min chart at the same time. My 30 min chart is wide enough to cover the last 30 days of trading.
Typically the auto-scale function will provide a price scale in $1, $2 or $5 increments depending on what stock I am viewing. The scale is a representation of how wide the range has been on that stock in the last 30 days.
Over the last several weeks the scaling has begun to show up in 50 cents increments or even 20 cent increments. That means the range of movement over the last 30 days has been very small. We all know as option traders that a small range typically represents low volatility.
When I look at the option montage the only strike with any premium is at the money. Strikes more than a buck or two out of the money are almost free. The premiums are just a few cents. Relative to the risk of holding through the earnings cycle there is no reward.
I tried to find a couple that had some premium with minimal risk and earnings were either distant or not a factor.
We had some stop losses hit last week so there was a lot of housekeeping today. Please read all the updates to see if your positions are included.
You may have heard that Goldman Sachs is predicting a drop to 1250 in the coming weeks because of the election risk, fiscal cliff and declining earnings. I would love to see it because that would pump up option premiums and give us some great entry points. Unfortunately it would also stop out our remaining plays so as the old saying goes "you can't have your cake and eat it too."
Send Jim an email
Current Position Changes
BMRN - Biomarin Pharma (Short Put - Stop Loss)
Please raise the stop loss on the BMRN short put. The prior trend is intact and BMRN has rallied to two month highs. I am raising the stop to protect profits. We will be exiting this play before earnings on Oct 25th.
BMRN Short Nov $37 Put, raise stop loss to $40.35
WLL - Whiting Petroleum (Short Put - Stopped)
Whiting also declined to hit our stop loss at $45.50 on Oct 2nd. The sharp drop in oil prices was too much for the energy sector.
Closed WLL Short NOV $44 Put, entry $1.50, exit $2.05, -0.55 loss
FFIV - F5 Networks (Short Put - Stopped)
FFIV declined to hit our stop loss at $103.50 on Oct 2nd. It was downgraded by Barclays and competitor ADTN warned.
Closed FFIV Short Nov $95 Put, entry $2.38, exit $3.55, -1.17 loss
NUS - Nu Skin Enterprises (Short Put)
NuSkin is going in the right direction so I am raising the stop loss to $39.50. We caught the bounce and this put has a very good chance of expiring worthless.
We need to exit before earnings on Oct 23rd.
Short NOV $35 Put, raise stop loss to $39.50.
INFY - Infosys (Short Put - Exit Tuesday)
INFY has earnings on Friday of this week. Shares of INFY declined the last two days. I was planning on exiting the day before earnings but with two days of declines putting us into a negative position I am not waiting. Please close this play on Tuesday morning.
Close NOV $45 Put, entry $1.05, currently $1.63, -0.58 loss.
CRR - Carbo Ceramics (Short Put - Stopped)
Carbo dipped on the 2nd to $61.34 and just enough to trigger our stop loss at $61.50. Fortunately the December option had not yet moved and there was no loss.
Closed CRR Short DEC $55 Put, entry $3.10, exit, $3.10, 0.00 gain.
New Short Put Recommendations
CLB - Core Labs (Short Put)
On Oct 2nd Core Labs warned that a slowdown in drilling activity in North America would pressure prior earnings guidance. Core does reservoir enhancements for oil and gas producers. They analyze the reservoir and then tell producers how best to produce the maximum oil and gas available in that field.
Over the third quarter the number of active drilling rigs in the U.S. declined by 112. Oil rigs peaked in August at 1,432 and have since declined -22 rigs. Gas rigs declined by 60 since early August.
There are multiple reasons for the decline in rigs but they are not important to this play. This was a cookie cutter press release. Earnings are going to decline a few cents from prior guidance to the range of $1.09-$1.13 but they will still be higher than Q2. Core also said Q4 earnings will be similar to Q3 so no further decline.
The key point to this play is that they already warned. Normally when a company warns they report higher than their warning numbers. When they warn they are preparing for the worst as they crunch the numbers. Unless the worst happens they normally report slightly better.
Core has already been crushed by the warning. The shares declined from just over $120 to just over $100. That is extreme when the warning was only a few cents. Support is $100 and shares are ticking slightly high from that level.
They will report earnings on Oct 17th. There is the potential for another decline but after dropping $20 already I view that as a slim possibility.
Sell short NOV $95 Put, currently $1.70, stop loss 98.50 (52-week low)
Core Labs Chart
MHK - Mohawk Industries (Short Put)
Mohawk produces carpet and floor coverings for residential and commercial markets in the U.S. and Europe. The current building boom in the U.S. is good for Mohawk. Shares are about to break out to a new 52-week high and sentiment in homebuilders is improving.
I am going to recommend the November $75 put but personally I would probably go for the $80 put the instant MHK broke to the new high over $82.68. The $80 put is worth about $1.35 more than the $75 put. That is just my personal preference but I do have a high tolerance for risk.
Earnings Nov 1st.
Sell short NOV $75 Put, currently $1.00, stop loss $79.50.
Chart of MHK
New Covered Call Recommendations
Long Term Recommendations
New Aggressive Recommendations
Existing Play Recommendations
Links to original play recommendation
EXXI - Energy XXI (LT Covered Call)
RIG - Transocean (Covered Call)
SBUX - Starbucks (Short Put Spread)
CRR- Carbo Ceramics (Short Put)
GG - GoldCorp (Short Put)
ADSK - Autodesk (Short Put)
BMRN - Biomarin (Short Put)
FFIV - F5 Networks (Short Put)
WLL - Whiting Petroleum (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.