This short squeeze has been brought to you by the adjournment of Congress until after Thanksgiving.
Don't get too excited about Monday's monster rally. This was just a well overdue short squeeze brought to you by a lack of headlines concerning the fiscal cliff. Congressional leaders made their joint microphone appearance on Friday and then beat a path out of town for the holidays. The president is on an overseas tour so cliff comments are also absent from the White House.
The short squeeze succeeded in producing 3% to 5% spikes in quite a few of oversold stocks. Apple rebounded +$38 today after a +$22 rebound on Friday. That powered the Nasdaq higher and forced a short squeeze in any Nasdaq stock.
This trading bounce is not likely to last. I expect we will see the gloom and doom return next week as lawmakers return to the task of producing negative headlines to show how they are standing up for your rights and crashing the market at the same time.
The scripted appearance on Friday was meant to calm the market by showing a solid front and a willingness to resolve the problem. Unfortunately it was simply a show of solidarity to calm the markets and the actual result of future negotiations is not likely to be so cordial.
I chose a couple more stocks this week for longer term plays so we don't have to be so concerned about the intraday volatility in the markets. Both stocks held up well during the market decline over the last two weeks. That suggests they will continue to hold up well when the markets turn choppy again.
I do expect additional volatility over the next four weeks so plan on some triple digit declines and some additional short squeezes. Uncertainty is going to be the rule in the days ahead.
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Current Position Changes
SHLD - Sears Holding (Short Put - Closed)
I recommended in the last newsletter to close the SHLD short put ahead of the expected earnings on Thursday. I am sure glad we did. SHLD fell from $60 to $46 after their earnings report. However, by exiting early we were able to capture a decent gain.
Closed SHLD Short Nov $55 Put, entry $1.70, exit 0.39, +1.31
ADSK - Autodesk (Short Put - Closed)
Autodesk lost its momentum and I recommended closing it last Tuesday for a minor loss of -30 cents. The earnings on Thursday were volatile but ADSK did manage to close higher. We would have been safe but there was too much risk to take the chance in a negative market.
Closed JAN $32 Put, entry $2.35, exit $2.58, -0.23 loss.
New Short Put Recommendations
New Covered Call Recommendations
Long Term Recommendations
FLS - Flowserve (Short Put)
Flowserve is a maker of pumps and valves for the energy sector, water sector and numerous manufacturing applications. They are one of the few companies that did not decline over the last two weeks when the market was crashing. They are very close to breaking out to a new high over $142.
The longer term option premiums are fairly high. With FLS at $138 today we can sell the April $125 put for $4.80 and be $13 under the stock price on a stock that is rising.
I would actually not have any problem selling the April $135 or $140 strikes as an aggressive trade because I believe FLS is going to breakout to that new high as soon as the market shakes off the fiscal cliff worries. Since that could be six weeks from now I am only going to recommend the $125 strike that is under support.
Currently FLS is riding the support of the 50-day average higher.
Sell short FLS April $125 Put, currently $4.80, stop $130.75.
PCYC - Pharmacyclics (Short Put)
Pharmacyclics is a drug research company with several promising drugs in the pipeline. On their recent earnings report they blew away estimates with sharply improving metrics but the stock was crushed in the days that followed. There was some discouraging news on a stage one cancer drug test and there was a share lockup on Nov 7th that allowed employees to sell their shares. This was significant since the employees own 20% of the company. In hindsight the big employee share dump did not occur and shares of PCYC have been trending higher even in a negative market.
The $15 decline in early November will insulate us somewhat from any future market decline. I believe PCYC will recover to resistance at $60 in the next six weeks, market permitting. I am recommending we sell the January $45 put, currently $2.05. If you want to be more aggressive you could move up to the $48 put, currently $3. I picked the $45 strike because that was the crash low back on the 7th.
Sell short PCYC Jan $45 Put, currently $2.05, stop $47.50
Chart of PCYC
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)
NFLX - NetFlix (Short Put)
ADSK - Autodesk (Short Put)
SHLD - Sears Holding (Short Put)
CAB - Cabela's (Short Put)
RGR - Sturm Ruger (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.