The flurry of earnings we saw last week only whetted the appetite of investors. The flurry turns into a flood this week.
With only 10% of companies reporting the earnings growth has averaged about 2.5%. That is slightly under expectations but still enough to keep investors from cashing in and heading back to bonds.
Revenues have been weak and guidance even weaker. The guidance has been comments like "we are well positioned for 2013." It is hard to trade that when it has no relativity to the analyst per share estimates.
I believe most companies are scared of what may happen as a result of the budget battles. They saw how commerce almost came to a halt in December on the fiscal cliff worries. They don't want to give earnings estimates until they see what February and March bring in the form of budget battles.
The republicans are going to offer to extend the debt ceiling until May 19th to take the pressure off the markets and allow the budget and spending battles to take center stage. That should be good for the markets. Can kicking three months into the future has always worked before.
The inauguration is over and those battles should begin soon. However, the markets should breathe a sigh of relief over the debt ceiling postponement.
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Current Position Changes
WLT - Walter Energy (Covered Call Expired)
We had a January $40 covered call on Walter that expired out of the money. We get to keep the $1.97 in premium. We bought Walter in mid December to write a call on it because of takeover rumors. Those rumors are still swirling but a lot more low key. Our adjusted cost in Walter is now $34.25. I am recommending we add a new call this week. See the covered call section for details.
Expired Jan $40 Call, entry $1.97, expired, +1.97 gain.
New Short Put Recommendations
SSYS - Stratasys Ltd (Short Put)
We have a successful put on DDD already in progress but Stratasys has gone vertical as well and has provided an opportunity for a duplicate play. They are both in the 3D printing business.
SSYS has surged over prior resistance at $85 and the premiums are huge due to the sudden volatility. I am recommending we write a March $80 put, currently $3.20 and it is nearly $10 OTM.
Sell short SSYS Mar $80 Put, currently $3.20, stop 82.95
New Covered Call Recommendations
RIG - Transocean Offshore
We currently have RIG in the portfolio after it was put to us back in May with a $54.52 cost. We sold calls against it three times for a net credit of $2.49. That reduces our cost to $52.03 and the stock is currently $55.78. I could close that position today for a minor profit. However, I believe Transocean is going to increase in price as a result of the Deepwater Horizon cloud evaporating.
Since I don't have a crystal ball I don't know for sure if that is going to happen. While there is plenty of excitement over Transocean I want to write one more call and go for the gusto on this trade.
The March options have not priced yet so I am going out to the May strikes. I want to write the May $57.50 call, currently $2.67. That extends the gains on the stock by about $2 and adds another $2.67 in premium. If we are called we end up with a decent profit. If not called we reduce our cost one more time.
Sell short RIG May $57.50 Call, currently $2.67, no stop.
WLT - Walter Energy
We had a January $40 covered call on Walter that expired out of the money. We get to keep the $1.97 in premium. I want to write a new February $37.50 call, currently $1.69 at the open on Tuesday.
Sell short WLT Feb $37.50 Call, currently $1.69, no stop
New Long Term Recommendations
CAB - Cabellas
Cabellas was flying high on strong sales and revenue until the polls showed president Obama would win reelection. His comments to supporters about doing something about guns caused the stock to -$12 once it appeared the election was certain. In mid December the shooting at Sandyhook sent the stock to a new low on worries over the guarantee of new gun laws.
Now that the president has made his announcement and several bills have been introduced into congress it appears that none of the strictest laws will pass. There will probably be a universal background check and that is a good thing and will not impede gun sales. The magazine ban may or may not be passed since the prior ban proved to be a failure at reducing crime. The assault weapon ban is not expected to pass because the prior ban also failed to reduce any crime.
As a result of these events the gun industry is seeing "record" sales of guns, ammo and accessories. Brownells, one of the biggest sellers of gun equipment said they sold several "years" of ammo in only a week. The FBI reported there were a record 2.78 million background checks in December. That surpassed the prior record set in November of 2.01 million. Checks for the full year totaled 19.6 million with nearly five million (25%) coming in just the last two months of the year.
Background checks only apply to about 60% of gun sales and some checks cover sales of more than one gun. If a person buys three guns from the same dealer there is only one check. Sales have increased even more in January after the president and vice president announced they were going to push for more laws.
The record sales in November and December are going to show up in the profits for Cabellas in the fourth quarter and first quarter. They should have record results.
The CEO said the pending laws would not have any material impact in their profits. They derive 20% of their sales from guns and accessories. He said "we will deal with whatever new laws are put forward as will every other retailer. The public will still be buying guns."
Cabellas announced last week they are planning three new stores to bring their total to 40 and they have 13 currently under construction.
Business is good for the outdoor retailer.
I believe CAB shares are going to hit new highs in the month ahead. They report earnings on Feb 14th.
I am recommending we sell a June $50 put, currently $4.60. This is at the money with the 52-week highs at $55.50. The pent up buying after the huge sell off and the record profits should keep it above that strike.
Sell short CAB June $50 Put, currently $4.60, stop $42.00
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.