Congress is back from the holiday break and it is time for the fiscal cliff headlines to return.
We were fortunate on Monday that the headlines actually rescued us from a deeper selloff. The Dow declined -120 by 11:30 but rebounded after the White House said the president had talked to both John Boehner and Harry Reid over the Thanksgiving break and the news prompted a market rebound.
Let's recap. The prior Friday the gang of four gave a carefully scripted microphone appearance of cooperation and hopefulness and the markets rallied over Thanksgoving week. Monday morning the markets declined on some weekend comments from various lawmakers about the fiscal cliff. At midday the White House announces unscheduled talks, not progress, but the market rallies. Do you think maybe they are finally getting the message that the market wants a solution and they can be heroes by getting something done?
How much better would the economy be if there were no storm clouds obscuring the view?
I may be jumping to conclusions here but I think we are closer to some positive events on the fiscal cliff negotiations than we are to a disaster. There may still be some bumps in the road because neither side is going to just roll over and give up all their positions at the start. Each position on each side is going to be traded for a concession from the other side and it will be a battle. However, I think the worst is behind us as far as the market goes. I believe there are more people who believe there will be a solution than those who still believe there will be a disaster.
I have moved into buy the dip mode rather than sell the rallies. I am normally early on my position changes so there may be some pain before the eventual gain but as long as you plan for the bumps they are not terminal.
I have a lot of position changes tonight and I also added two new plays. Let's hope the politicians keep the market mostly positive through a wise use of press comments.
Send Jim an email
Current Position Changes
RGR - Sturm Ruger (Short Put - Close Dec 3rd)
On Thursday Sturm Ruger (RGR) declared a special dividend of $4.50. Shares of RGR are up +$6.50 from the prior Friday's close. The stock had been volatile just ahead of the election when it appeared for several weeks that Romney might actually win. Hopes for a pro-gun president in the White House pushed shares of RGR down to $43 from their September high of $53. When president Obama won reelection the stock shot higher on worries about new gun control measures. Orders are off the charts and background checks are running at 14 month highs.
Sturm Ruger has been printing money as a result of the president's known anti-gun views and worries over future ant-gun measures. Now that he no longer has to worry about reelection the odds are even higher for some unpopular legislation ahead. He has told supporters he is planning on supporting several initiatives.
Ruger has been so profitable they decided to declare a special dividend of $4.50 payable on Dec 21st to holders of record on Dec 7th. Because stocks normally go down when they go ex-dividend (Dec-5th) we need to close this position on Monday Dec 3rd to avoid the drop.
The CEO said the company based the dividend on the analysis that they could continue to fund its own growth and its regular quarterly dividend, while still growing cash reserves. Management's comments suggest they are expecting the sales boom to continue through next year.
Close on Dec 3rd RGR Short Apr $45 Put, entry $3.40, currently $2.15
NFLX - NetFlix (Short Put - Close)
NetFlix has been moving up nicely since November 1st but this stock is not known for long slow gains. Movement in NFLX is normally highly volatile. I am afraid the next bout of market volatility could be in the wrong direction for NFLX shareholders. It has been several weeks since I have heard some noted short seller stating his case. It is about time for one to appear.
We sold the put for $2.03 and it has declined to 45 cents. There is not much reward left for sticking with the play. I am a fan of not trying to squeeze the last nickel from a play. I prefer to take a reasonable profit when it is offered and then move on to another play.
Close NFLX Dec $65 Put, entry $2.03, currently 0.45, +1.58 gain.
EXXI - Energy XXI (Covered Call - Close)
We have had a covered call on EXXI since February. We have written four calls against the stock and all but one were closed for a profit. The fourth was a breakeven when it was stopped out on a spike higher. We had a higher basis than the strike price at the time and did not want to be called for a loss.
We wrote the first call with the stock at $38.12. We have taken in premium of $2.99, $1.39 and $2.51 for a total of $6.89. The stock closed today at $31.54. Exiting today gives us a total of $38.43 and only a little more than a breakeven.
The reason for the exit is a change in outlook for EXXI. The stock declined -$2.39 today after a joint venture well with McMoran turned into a disaster. The Davy Jones 1 well is in the process of failing a pressure test after nearly a year of costly challenges. Were it not for the news today on the DJ1 well I would continue holding EXXI and writing calls. However the picture has turned negative and today's decline could be the first of many.
I am recommending we exit this position and move on to the next opportunity.
Buy to close EXXI Dec $35 Call, entry $3.00, currently 0.49, +2.51 gain.
Sell EXXI stock, entry $38.12, currently $31.54, plus premium received of $6.89, +0.31 gain
New Short Put Recommendations
VMW - VM Ware (Short put)
VMWare has rebounded from long term support at $84 on news it has cut its licensing threshold to more accurately target companies with 250-500 employees. VMW cut the Advantage Plus license from $10,000 to $6,000 as it aggressively seeks new partners as a way to tout virtualization.
VMW has always been a volatile stock with high premiums. The $80-$85 level has been strong support since early 2011 and the recent bounce from that level should be ongoing.
I am recommending we sell the Jan $85 put, currently $2.35. If this bounce continues past initial resistance at $91 we could see another attempt at $100.
Sell short VMW Jan $85 Put, currently $2.35, stop $85.00
New Covered Call Recommendations
New Long Term Recommendations
New Aggressive Recommendations
DECK - Deckers Outdoor (Short Put)
Maybe this is the season to buy Uggs. Actually buy the company not the boots. Jefferies Group told clients Monday that higher costs for sheepskin and warmer weather had pushed the price for Deckers shares down -56% and that made them an acquisition target.
Deckers fell to its lowest level on an earnings basis since 2009 at 8.2 times profits. With Uggs footwear and Teva sandals and the opportunity to expand into handbags and men's footwear the brand would be attractive for private equity firms and rivals like VF Corp (VFC), owner of the North Face and Timberland brands.
Rarely do these types of analyst notes actually result in the sale of a company but they do tend to spike the price of the stock. DECK was up +6.5% on Monday to close at $35.25.
While there may not be an acquisition in the near future the same analysis by Bloomberg and others showed how undervalued DECK was to its competitors. That means investors will be paying attention and the stock should rise.
We saw a sharp drop in late October when Deckers cut its sales forecast. The company said the higher cost for sheepskin and the associated rise in prices for the boots was hurting sales. The warmer weather last winter and late arrival of fall this year had cut boot demand. This is a temporary situation and is now priced into the stock.
Even without a pending acquisition the stock should at least move sideways with all the bad news now in the stock price.
I am recommending we sell the Jan $30.00 put, currently $1.40. You could go a little more aggressive and sell the Jan $32.50 put for $2.25 but that would be up to you.
Sell short DECK Jan $30 Put, currently $1.40, stop $31.75
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)
CAB - Cabela's (Short Put)
RGR - Sturm Ruger (Short Put)
FLS - FlowServe (Short Put)
PCYC - Pharmacyclics (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.