The tempers in Washington have flared significantly since last week and still ten days to go.

I wrote last week the potential for volatility was strong. That is even truer this week with the countdown clock ticking away towards the debt ceiling deadline on October 17th. The claims and counter claims are flying and both parties continue to swear they are not going to change their positions. This is going to be a case of which party blinks first.

Japan and China warned the U.S. tonight to make sure a default did not occur. China also warned the U.S. that a repeat of 2011 was possible where S&P downgraded the U.S. debt rating. That would cause interest rates to rise and further slow the struggling recovery.

With both parties steadfast in their positions the rest of this week is shaping up to be a disaster for the equity markets. At the risk of repeating myself selling premium is a bullish strategy for neutral to bullish markets. It is not a strategy for rapidly declining markets.

Once we find a bottom, probably late this week or early next week, we should have a great opportunity to establish new positions. I am not recommending any new positions this week other than changes to existing positions. If it appears a bottom is forming I will send new plays to capitalize on the rebound. That does not mean a one day short squeeze like we had on Friday but something that looks like a real bottom accompanied by improving headlines in Washington.

There is no need to force plays just to have something to do.

Reader Play

A reader sent this a couple days ago.

I wanted to share a credit spread I did today. I did the Ceasars Nov. 12.5 and 22.5 put credit spread and the Nov. 12.5 and 22.5 call spread. I took in $11.20 on a 10 point spread for 20 contracts! I cannot lose and will make $2400 at Nov. expiration with no risk. Mike

Today that same combination would generate $11.05 in premium and like Mike said there is little to no risk. If the stock goes up the puts expire worthless and the calls maintain their ratio. If the stock goes down the calls shrink and the puts maintain their ratio. It looks like a good play. Thanks Mike!

If anyone else has plays they want to submit I will be happy to pass them on to everyone else. If I print it in the newsletter I will send you a real U.S. Silver Dollar worth $25 at today's prices.

Jim Brown

Send Jim an email



Current Portfolio


Current positions

Covered Calls

Long Term Positions - None


Current Position Changes


RAX - Rackspace Hosting (Close)

RackSpace was knocked for a $3 loss on the October 3rd announcement by Verizon that they are going into a big push into Cloud computing. This additional competition plus IBM ramping up their cloud efforts put RAX into a dive. I am recommending we exit now while we can bail a minor loss.

Close RAX shares, entry $52.17, currently $49.97, -2.19 loss
Buy to close OCT $52.50 call, entry $2.13, currently .60, +1.53 gain
Net loss = -.66



New Short Put Recommendations


None


New Covered Call Recommendations


JASO - JA Solar (Covered Call)

We have a position in JASO shares. We wrote two covered calls on the stock and both expired worthless. The stock has rallied back to the $11 area after dipping in August. It is time to write a new call.

Sell NOV $11 Call, currently .75, no stop.

Note: If you want to step out to December you can sell the $12 call for 80 cents and pick up another buck on the stock appreciation. The stock is in an uptrend at present but $11 is resistance.



New Aggressive Recommendations


None


New Long Term Recommendations


None


Existing Play Recommendations


Links to original play recommendation

PHM - Pulte Homes (Covered Call)

PHM - Pulte Homes (CC Update)

BZH - Beazer Homes (Covered Call)

JASO - JA Solar (Covered Call)

CZR - Caesar Ent (Covered Call)

RAX - Rackspace Hosting (Covered Call)

GMCR - Green Mountain Coffee (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.