When the VIX is low it is time to go. Unfortunately there is no expiration date on that adage.
The VIX closed at 13.52 on Monday and right at a five-year low. In theory the extreme lows on the VIX suggest the market is overly complacent and nobody is buying insurance in the form of puts. Most professional investors like to bet against the herd and a low VIX means the herd is irrationally exuberant.
However, it is not like there is a magic number where a decline to that level produces an instant response and an immediate market selloff. The VIX is like a time delay fuse only we don't know what time is left on the clock. We know there is volatility ahead but we don't know when.
Actually, in this case I believe we know exactly where the volatility will erupt. I suspect it will begin the week after the inauguration, which occurs on Jan 21st. All the fun and games and lavish parties will be out of the way and it will be time to load the verbal cannons and batten down the hatches for the debt war ahead.
The first two weeks of earnings will be over and enough major companies will have reported to tell investors how the earnings cycle will end. By the first week in March the battle should be in full swing and without a major concession from either party the outlook should be deteriorating.
Treasury Secretary Geithner sent a letter to Congress on Monday saying the government could run out of cash as early as February 15th or as late as the first week of March. Obviously you know when this is going to be resolved. Nothing concrete will be solved until the last minute but the markets will have all of February to worry about it.
Selling puts into this low volatility, low premium environment with dozens of companies reporting earnings every day is going to be a challenge. DON'T feel bad if you elect to pass on initiating new positions. I completely understand and I would recommend that course of action. However, this is an investment newsletter and the natives get restless if there are no new plays.
Send Jim an email
Current Position Changes
DDD - 3D Systems (Short put - Stopped)
This was a very short play. I recommended it last Monday. On Tuesday morning DDD gapped open to a new historic high just below $62 on news from the CES show and then crashed back to $56 before 11:AM. That stopped us out by 50 cents and gave us a 60 cent loss. That was the low for the week and DDD is already back above where we instituted the position.
Stopped DDD Short Feb $55 Put, entry $2.20, exit $2.80, -0.60
New Short Put Recommendations
DDD - 3-D Systems Corp (Short Put - Rerun)
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 demonstrated new models at the CES show in Vegas and they were a hit. Competitors are Stratasys (SSYS) and Dassault Systems (DASTY).
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.
We were stopped out on this play last week by a random spike and the stock is pressing the highs once again. Earnings are not until Feb 18th or later.
Sell Short Feb $55 Put, currently $1.85, stop loss $56.50
KORS - Michael Kors (Short Put)
We already have a covered call on KORS but the chart pattern and news was so positive I could not resist adding a new short put position. Shares are breaking out of congestion from the last couple of weeks and firm support has appeared at $51. Earnings are just before February expiration so we should be able to exit early if the trend continues. Coach is exploding higher and Kors is tagging along. They did not warn and they have been beating estimates so expectations are high.
Earnings Feb 13th - 18th.
Sell short Feb $50 Put, currently $2.25, stop $51.00.
New Covered Call Recommendations
New Long Term Recommendations
New Aggressive Recommendations
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)
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.