Apparently the majority of investors still expect a fiscal cliff resolution and the market is creeping higher despite the headlines.

I am going to try and make this brief since everyone is probably "cliffed" out by now. The markets are inching higher despite a full court press by the democrats to raise taxes and efforts by the republicans to cut spending. Neither side is having any success and the clock is ticking down towards an automatic tax increase on Jan 1st.

The market believes there will be a resolution even though the democrats have said they will go over the cliff rather than give up their position.

Nothing has changed since last week. Eventually some headline will shatter the calm and we could see the market change directions in a heartbeat.

I still believe we should buy any dip the headlines create. The cliff is not a cliff but a slope and even if we pass the December 31st deadline the impact to the economy will be negligible in the early weeks of 2013. The impact will grow the longer the points remain unresolved but that is a discussion for another day.

I tried to find some new positions that would be less reactive to future market volatility but that is a tough task. Who knows what investors will do when their resolutions dreams are shattered? We saw the Dow decline -1,000 points in August 2011 when the last battle took place. Very few stocks, if any, were immune to that decline.

With the market trending higher the put premiums have deflated. We need a good dose of volatility to give us some better opportunities.

Jim Brown

Send Jim an email



Current Portfolio


Current positions

Current positions


Current Position Changes


DECK - Deckers Outdoor (Short Put)

The Deckers play was going great until Monday when shares declined -8% or -$3.34 on no news. DECK is still $5 above where we started the play but that kind of a decline on no news is concerning. I am raising the stop loss to $37.40 just in case the decline continues.

Short Jan $30 Put, entry $1.30, currently .46, raise stop to $37.40

DECK Chart


CAB - Cabellas (Short Put)

Cabellas also lost momentum and has settled at support around $46.50. I am raising the stop loss to $45.70 to take us out if support fails.

CAB March $45 Put, entry $3.50, currently $2.65, raise stop to $45.70

CAB Chart


New Short Put Recommendations


ENR - Energizer Holdings (Short Put)

Energizer hit a new high this week thanks to strong share buybacks and a business model that keeps going and going and going. The fourth quarter is typically strong for Energizer as consumers buy millions of batteries for those new electronic toys.

Energizer posted an earnings surprise of more than 13% in Q3 with earnings of $1.76, which was a 60% increase over the comparison quarter. Strong earnings should insulate ENR from some of the future market volatility. All 12 analysts following the stock have raised their earnings estimates for the full year.

ENR broke out to a new high this week and does not appear it is going to retreat.

ENR is a higher priced stock than I normally choose but I could not find any cheaper stocks with decent put premiums. A bullish trending market tends to shrink put premiums.

Sell short ENR Feb $75 Put, currently $1.50, no stop

ENR Chart


New Covered Call Recommendations


WLT - Walter Energy (Covered Call)

Walter Energy is a met coal producer. It is considered a pure play on the met coal used to make steel. With China's economy improving and a shortage of met coal worldwide Walter has been rumored as an acquisition target by multiple mining companies including BHP and Glenstrata. Shares have popped up significantly in the last couple days as the rumors heat up.

I am going to use the premium inflation from the rumors as an entry point on a covered call play. We can write the Jan $40 call for $1.96 with WLT at $36.34 today. If we are called away it would be a profit of $5.62 for a 45 day trade. I would take that any day. If we are not called we will do it again next month.

Buy/write WLT JAN $40 Call, currently $1.96, no stop.

WLT Chart


New Long Term Recommendations


None


New Aggressive Recommendations


None


Existing Play Recommendations


Links to original play recommendation

RIG - Transocean (Covered Call)

SBUX - Starbucks (Short Put Spread)

CAB - Cabela's (Short Put)

FLS - FlowServe (Short Put)

PCYC - Pharmacyclics (Short Put)

VMW - VMWare (Short Put)

DECK - Deckers (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.