You have heard the saying the trend is your friend. The last half of that sentence is "Until it ends."

Nobody knows when the five month rally is going to end. We all know it will but nobody can see the future. Very few analysts and technicians thought it would last this long. When it did the "Sell in May" slogan became the daily warning. It is May and nobody sold.

However, it would be premature to claim no sell off in May with only four trading days behind us. The payroll report was met with a major short squeeze on Friday but no real volume. On Monday the report was criticized a little more in depth since everyone had the weekend to think about the details. Still there was no sell off.

The markets traded to a draw with all but the Dow posting minor gains. IBM and JNJ were the two major Dow losers that caused a fractional loss in the index. On the bullish side the Nasdaq surged to a new 12 year high and the Russell 2000 made the largest percentage gain. Fund managers have apparently lost their fear of summer and were buying small caps instead of blue chips today.

I have a hard time buying breakout new highs. I know that is an established strategy that tends to do well but there are qualifications. New highs at the end of a five month rally would be stretching the credibility of that strategy but bull markets tend to remain irrational far longer than shorts can remain liquid.

The market wants to go higher but desire by thousands of investors does not always make it happen. There is still uncertainty and as long as that uncertainty and worry about a correction exists it will probably continue to move higher. Daily short squeezes tend to build on themselves. Every pause or sign of hesitation triggers a new wave of shorting. Every uptick triggers a new wave of short covering. Every dip bought seduces investors into putting new cash to work.

Eventually the house of cards will collapse. There will be a decent correction and everyone still long will give back a large chunk of their profits and close their positions in disgust. That will be the capitulation moment that brings the dip buyers back in volume and the process will restart.

I hesitate to add new positions but since nobody has an infallible crystal ball we need to remember, the trend is our friend until it ends. We will remain in the market until forced out. If you are uncomfortable with this mindset then remain in cash and wait for the eventual correction. We will have some major opportunities when it comes.

I am sticking with covered calls for now because put premiums are flat, call premiums are inflated and eventually a dip will appear.

Jim Brown

Send Jim an email



Current Portfolio


Current positions


Current Position Changes


PCYC - Pharmacyclics (Stopped)

The PCYC short put was stopped out on May 1st when the stock collapsed below support at $80. We suffered a big loss because the drop for the day was close to $5. The stop at $79.85 was not close enough to protect from the gap down open.

Stopped: MAY $75 Put, entry $2.00, exit $3.50, -1.50 loss.

PCYC Chart


MNST - Monster Beverage (Close)

Monster has been going sideways in a positive market. We have a May $52.50 put with 8 days to go but the stock can't seem to break out of its consolidation rut above $55. I am afraid the lack of forward motion could resolve itself into a decline if the market were to weaken. We have a decent profit and I would rather capture that profit now than get knocked for a loss while we try to squeeze out a few more pennies.

Close MNST May $52.50 Put, entry $2.35, currently $1.05, +$1.40 gain

MNST Chart


New Short Put Recommendations


None


New Covered Call Recommendations


CCJ - Cameco (Covered Call)

Cameco reported earnings of 7 cents on a -5% decline in revenue due to lower prices for uranium. They produced 5.9 million pounds and sold 5.1 million pounds at an average price of $48.25 per pound. Analysts were expecting earnings of 8 cents. CCJ shares spiked after the company said Japan is preparing to restart some reactors with 6-8 this year and another group in 2014. A mining analyst at Salman Partners said he expects a total of 20 Japanese reactors to be restarted. That will increase uranium demand by 4.5%. At the same time the Russian Megatons to Megawatts program to convert warheads into uranium fuel ends this year and Russia has said it has no interest in extending the program. This program has supplied up to 20% of the world's uranium fuel for the last 10 years. Removing that much supply from the market in 2014 plus the restart of Japan and new reactors coming online suggest the price of uranium is finally going to soar.

More than 500 reactors either under construction or in the planning stages around the world compared to 453 currently in operation. Uranium demand has nowhere to go but up over the next ten years.

Cameco has been weak for the last two years as a result of the shutdown of the Japanese reactors. This pressure uranium prices as the supply committed to those reactors was sold into the market. That pressure is behind us and Cameco should continue to move higher.

The June $20 call is not expensive but assuming the broader market does not collapse we should be guaranteed of being called. If not then we will sell the July calls when they are added. This is an inexpensive stock with the bad days behind it.

If you do covered calls on margin this is about a 7% return for one month.

Buy-Write CCJ June $20.00 covered call, currently $19.96-0.75, no stop.

CCJ Chart


PHM - Pulte Homes

The housing sector just keeps moving higher and Pulte is the leader with the best chart. We are entering the selling season for home builders and expectations should continue to improve.

You know the story on the homebuilders so I don't need to really explain it here.

Pulte is breaking out over resistance at 21.50 and I think it is headed higher. There is decent support at $21 from the post earnings consolidation in late April.

Buy-Write PHM June $23.00 covered call, currently $22.64-1.99, no stop.

Pulte Chart


New Long Term Recommendations


None


New Aggressive Recommendations


HLF - Herbalife (Covered Call)

Herbalife has been under attack by hedge fund guru Bill Ackman. He has bet more than $1 billion in a short against HLF. Numerous managers have come out against the position claiming Herbalife is a good company. Carl Icahn has taken a large ownership stake in the company and continues to talk about taking it private. Herbalife was mentioned in the Berkshire shareholder meeting last weekend. Their earnings were outstanding and the stock continues to improve.

Icahn said this was going to be the mother of all short squeezes when Ackman is forced to cover. Ackman announced his short with HLF shares under $42. Shares declined to $24 in the weeks to follow. They have now rebounded back above $42 and above the price Ackman announced. If I had a billion dollars at stake and the stock had recovered that much I would be getting pretty nervous. This is the point where just a little more buying by these other fund managers could trigger the squeeze.

I am recommending a covered call on HLF because I think Ackman is going to be squeezed. The option premiums are high and we can get a decent return with the potential for repeating it for several months. I put this play in the aggressive category because it is Herbalife. Nobody knows where this stock will be six months from now.

Buy-Write HLF June $44.00 covered call, currently $42.64-1.95, no stop.
Profit if called $1.95 + $1.36 = $3.31

HLF Chart


Existing Play Recommendations


Links to original play recommendation

RIG - Transocean (Covered Call)

BSFT - Broadsoft (Covered Call)

GMCR - Green Mountain (Covered Call)

MNST - Monster Beverage (Short Put)

SLW - Silver Wheaton (Covered Call)

PCYC - Pharmacyclics (Short Put)

TSLA - Tesla Motors (Covered Call)

SCTY - Solar City (Covered Call)


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.