There is a correction in our future but we may not live to see it.

The number of analysts predicting an imminent correction seem to increase every day. However, every dip gets bought. Even though we did not post gains today the indexes came very close after rebounding back from the morning dip. The S&P closed down -0.92 points. The Russell 2000 lost -0.63 points. The Nasdaq -1.87 and the Dow battled back to lose only -21.

The earnings cycle is winding down and it actually turned out better than expected. Fund flows are positive and nobody seems to be taking the correction forecasts seriously.

Maybe there is just enough bearishness in the market to keep everybody from going "all in" and the constant dips are allowing people an excuse to take profits while giving others an opportunity to buy.

While we know this bullish market will not last forever, nobody can tell us in advance when it will end. That leaves us trying to find bullish plays in a market that has gone up for six straight weeks. If you discount a couple hiccups in December for fiscal cliff fears it has gone straight up since November 16th.

Volatility is at five-year lows and that means puts have no premiums. We should be buying puts instead of trying to sell them.

The chart I am using to guide my market direction tonight is the Russell 2000. The Russell is wedging up to a breakout over 915 and using 910 as support. This is new high territory for the Russell and fund managers do not appear to be concerned about the +19% gained since the November dip. By any yardstick the Russell is over extended but it has suffered several days of profit taking over the last two weeks and that has apparently relieved the pressure. It looks like the Russell is primed for a continued move higher.

Of course as soon as I say that the index will implode the next day. When things look their best there is usually an ugly surprise in our future.

Russell 2000 Chart

I looked at more than 500 charts today and more than 300 option montages. With put premiums less than 50 cents in most cases there was almost nothing worth playing. With the VIX at 12.94 there are very few put premiums worth selling.

There is never a sure thing in the market. We try to find the best choices and then deal with the potholes as they appear. I plan on keeping a small list of recommendations over the next several weeks until a decent dip appears that will reduce our risk.

Jim Brown

Send Jim an email



Current Portfolio


Current positions

Current positions


Current Position Changes


None


New Short Put Recommendations


IOC - Interoil Corp (Short Put)

Interoil is an old favorite. The option premiums are always huge and Cark Icahn is a big investor. IOC actually has a positive chart this time with a potential breakout in progress over the $62.50 level. Unfortunately it has earnings on Thursday. We need to wait to enter this play until after their earnings. If they miss we are likely to see a big spike down but support at $55 should hold. If they have good news we could see the rebound continue. Either way the option premiums are likely to remain high. Any volatility surrounding the earnings will only increase the premiums.

Today I am looking at the March $55 put at $2.28 but after the earnings report we could be a strike higher or lower. This is an unusual play recommendation in that I am not making a hard entry today. I am recommending we wait until Friday. I am describing the play in advance so we can be ready. I will send an update email after their earnings release.

Possible target: March $55 Put, currently $2.28. DO NOT ENTER YET.

Interoil Chart


SODA - Sodastream Intl (Short Put)

SodaStream had its Superbowl advertising rejected by CBS and that turned out to be a good thing. The ad has already gotten 4.3 million views on YouTube. The company makes a home beverage machine that produces sodapop in the flavor of your choice. The system is sold in more than 15,000 retailers in the USA and thousands more around the world. Earnings growth in 2012 are expected to be +57% and average +30% over the next five years.

In Q3 revenue jumped +48.7% and earnings rose +66.7%. Analysts continue to underestimate the company. Zacks rates it a strong buy.

Here is the catch. Earnings are February 20th. In theory they should beat estimates and move higher but we know from experience that theory seldom proves out in practice.

I am still going to recommend SodaStream today and should we be unfortunate enough to see the stock decline on the 21st and stay below our strike price we will write covered calls against it. The call premiums are huge. A $50 March call is $3.70 today.

This is a risk position and we could end up being put the stock.

Sell short SODA Mar $45 Put, currently $1.80, no stop.

SODA 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)

WLT - Walter Energy (Covered Call)

NFLX - NetFlix (Short Put)

KORS - Michael Kors (Short Put)

VIX - Volatility Index (Short Put)

CAB - Cabellas (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.