Dust off your crystal ball and bet on the earnings race. Who will beat and who will fall behind.

For those political junkies out there you will just have to wait until February while traders play the earnings parade. The earnings cycle will be a nice distraction while the politicians are preparing to do battle in late February.

The only thing I really fear today is how much the expectations for a debt disaster in late February will weigh on the market through the earnings cycle. I am hopeful the politicians will fade into the background for the rest of January or at least be replaced by the earnings news.

Quite a few companies lowered guidance for Q4 earlier in the cycle but over the last several weeks it has been relatively quiet. I am hoping this is an indication the earnings will be better than expected.

The problem with the earnings cycle is that it takes a lot of stocks out of play. We don't want to sell puts on a stock with earnings in two weeks. The potential for a monster drop on an earnings miss is very strong. There is always the potential for an earnings miss by one company tanking the rest of the companies in the sector. The earnings cycle is a minefield but we will try to pick our steps carefully.

We closed several profitable positions last week so the portfolio is rather skinny. I did raise the stop losses on two of the remaining plays.

We had some good news on Transocean. You may remember I closed the outstanding January covered call on RIG because there was nothing to be gained by leaving it open and I was expecting a potential settlement on the Deepwater Horizon liability trial. I expected RIG to rocket higher when a settlement was announced.

The rocket took flight on January 2nd when the rumor broke they had completed the settlement. The official announcement on the 3rd kicked it into high gear. RIG has gained +$8 in the last four days.

We had originally acquired the RIG position then the stock was put to us back in May. We wrote three successful covered calls on the position. I looked at writing another one today but the call premiums were too small. For instance the Feb $55 call was 94 cents. I believe traders feel the spike has run its course and that is why the premium is low. I could close the position today for a profit but I think there is more room to run. I will watch it another week and then make the decision to close or extend.

Jim Brown

Send Jim an email

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Current Portfolio


Current positions

Current positions


Current Position Changes


None


New Short Put Recommendations


DDD - 3-D Systems Corp (Short Put)

3-D Systems is the leader in a revolutionary new line of printers that actually print in three dimensions. The printer takes an image of the item to be printed and then actually builds the image out of various forms of plastic while you wait. For instance you could scan a wrench, coffee cup, flower, etc and then have the machine print you an exact copy of that item in plastic.

They are demonstrating new models at the CES show in Vegas and they have been a hit. Competitors are Stratasys (SSYS) and Dassault Systems (DASTY). I looked at SSYS but the open interest was too low.

The CES buzz is powering the stock and earnings are not until Mid February. The long term chart is crazy because this technology is really taking off.

Sell Short Feb $55 Put, currently $2.25, stop loss $56.50

DDD Chart


EXPE - Expedia Inc (Short Put)

The transportation sector is on fire. Airlines are flying at 100%. Fuel prices are falling and the economy is slowly improving. Expedia closed at a new high on Friday and only gave back a nickel today. Earnings are not until Feb 7th.

Expedia moved sideways in a consolidation pattern from August through December with a small uptrend of higher highs and higher lows. The breakout finally came last week with the move over $62.

Sell short Feb $60 Put, currently $2.30, stop $61.95.

Expedia Chart


New Covered Call Recommendations


None


New Long Term Recommendations


None


New Aggressive Recommendations


None


Existing Play Recommendations


Links to original play recommendation

RIG - Transocean (Covered Call)

FLS - FlowServe (Short Put)

WLT - Walter Energy (Covered Call)

NFLX - NetFlix (Short Put)

VIX - Volatility Index (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.