The markets traded lower again on Wednesday as fears grew the fiscal cliff negotiations were going to turn hostile.
All the major players were still on vacation and absent from Washington so there were no fiscal cliff headlines. The majority of the sound bites were reporters trying to make news by rearranging their prior reporting to sound like new events. It did not work.
The big news was the letter Treasury Secretary Geithner sent to the congressional leaders on Wednesday notifying them the U.S. will hit the statutory debt ceiling on Monday December 31st. To avert a default the Treasury Dept will resort to "extraordinary measures" to fund the government's debt needs until the end of February. That will require $200 billion in halts to payments and temporary transfers of cash from various other accounts. Treasury will run out of options by the end of February.
This letter means the debt ceiling debate just accelerated from late January and early February to become a trump card to be played by the House in the current fiscal cliff negotiations.
This means the volume on the fiscal cliff debate just escalated and we are going to start hearing warnings about the impending shutdown of the government, halts to payments for things like military, social security and Medicare, food stamps, etc. This is a commonly used scare tactic despite the potential for those actions being miniscule. Those threats make big headlines and are used to try to force the other side to retreat.
Make no mistake, the tone of the debate is about to turn significantly more negative unless the parties agree to a temporary extension of the fiscal cliff to get the negotiations out of the headlines.
For this reason I expect the market to become increasingly volatile and have the potential to move several percent in either direction. However, without a cliff compromise that direction is most likely to be negative. Even with a deal there are a large number of analysts expecting a sell the news event in January.
I am going to close several positions today and skinny up the portfolio as we go into the potential cliff event. There is no reason to add new risk ahead of the potential volatility. Choosing when to trade is just as important as choosing what to trade.
There is another cliff readers should worry about this week. That is the "subscription cliff." Each year we run an end of year subscription special. With December rapidly drawing to a close the EOY special is about to expire as well when the calendar turns over to 2013.
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Current Position Changes
PCYC - Pharmacylics (Short Put - Closed)
I recommended last week that we close the PCYC position after the stock had rallied +$10. The put has declined to only 10 cents and there is nothing to be gained by continuing to hold it.
Closed: PCYC Jan $45 Put, entry $2.03, Exit $.10, +1.93 gain
ATHN - Athena Health (Short Put - Close)
ATHN rallied +$10 over the last two weeks and our short $60 put is almost worthless at 15 cents. Rather than leave the play open and risk fiscal cliff volatility I am recommending we close the position.
Close ATHN Jan $60.00 Put, entry $2.50, currently $.15, +2.35 gain
VMW - VMWare (Short Put - Close)
VMW has rallied +$5 from when we initiated the position. The short put has declined in value from $2.30 to 60 cents. I would normally like to see it a little lower before pulling the exit trigger but after spiking to $99.55 on the 19th it has given back -$5 to close at $94.86 today. Any market volatility could see temporary support at $94.50 break. Let's not be greedy and take profits now.
Close VMW short Jan $85 Put, entry $2.30, currently 0.60, +1.70 gain.
ENR - Energizer (Short Put - Close)
We are short the Feb $75 put with an entry at $81.96 on ENR. The stock has changed its trend and now appears poised to break support at $79.50. I am recommending we close the play for a breakeven.
Close short ENR Feb $75 Put, entry $1.45, currently $1.45, breakeven.
SBUX - Starbuxks (Short Put - Close)
Starbucks has been a nightmare position for us. We initiated the long term position back in May and it went against us. We added a long June $55 put that was stopped out on a rebound for a +1.58 gain. We added another protective put position using the Sept $42 put as SBUX was diving but the stock turned around and that put expired worthless.
Shares of SBUX declined to as low as $44 and the primary short put was significantly in the money. We have nursed it until it has returned to a breakeven position and I am recommending we close it and take our risk off the table. With the retail sales numbers for December looking grim we could see SBUX roll over at this level.
Close SBUX short Jan $60 put, entry $6.78, currently $6.95, -17 cent loss.
Closed: Long June $55 put, entry $1.06, exit $2.64, +1.58 gain.
Closed: Long Sept $42 put, entry $1.08, expired, -1.08 loss.
Net position (-.17, +1.58, -1.08 = +.33 gain)
CRR - Carbo Ceramics (Short Put - Stopped)
Carbo Ceramics broke support on Monday with a combined two-day decline of -$5 to stop us out at $78.40. As much as any stop can be painful it was not as bad as it could have been. The option was trading at $5.20 at the time for a -70 cent loss.
Closed CRR Short March $75 Put, entry $4.50, exit $5.20, -0.70 loss.
New Short Put Recommendations
New Covered Call Recommendations
New Long Term Recommendations
New Aggressive Recommendations
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)
ATHN - AthenaHealth (Short Put)
DECK - Deckers (Short Put)
WLT - Walter Energy (Covered Call)
ENR - Energizer (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.