Late Monday evening Harry Reid and Mitch McConnell said significant progress but no deal.

This is just another chapter in the long running government shutdown saga. After two weeks of declines the Dow has rebounded +600 points on hopes a deal can be reached before the debt ceiling deadline on Thursday. If we get through Tuesday without a deal the market may not be so forgiving.

We are reaching the point where lawmakers will not have time to debate and pass any bills related to a deal before the deadline. We are only hours away from that debate deadline. Having the senate present the bill cuts down on the time required because they have a 3-day process to debate and vote on a bill. The house can do it in one day. The problem arises if the house does not like the bill the senate sends them. There will not be enough time to debate it, correct it, vote and then send it back to the senate for consideration. At this point the house is going to be stuck with anything the senate sends them.

This last minute grandstanding by Harry Reid waiting until the last minute to send a bill to the house may not go over well with the market. If investors believe the house is desperate enough to kick it back to the senate and go over the Thursday debt ceiling deadline then we could see a serious dumping of equities.

Going beyond the Thursday deadline could lead to another debt rating downgrade and a sharp rise in interest rates. We are already the laughing stock of the world because we can't keep our government running. Foreigners don't understand our system of government.

With the result of a default too serious to comprehend it is thought the house will be forced to accept whatever Harry Reid sends them. While it will relieve the short term problems it will only make the republicans more resolved to get payback when the next deadline arrives.

Focusing on the short term outlook I expect the market to rally on any deal that avoids the debt ceiling default. All of the chatter from Washington suggests the next date for a budget challenge will be January and a debt ceiling fight in February. That could change a dozen times by morning but that is the current rumor.

That would get us through year-end without any further headline wars in Washington. It would allow investors to focus on earnings and the economy rather than an ego contest between lawmakers.

The Nasdaq closed within 2 points of a 13 year high and the Russell 2000 did close at a historic high. That suggests market sentiment is very strong and investors believe a default will be avoided.

Jim Brown

Send Jim an email



Current Portfolio


Current positions

Covered Calls

Long Term Positions - None


Current Position Changes


RAX - Rackspace Hosting (Closed)

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 recommended we exit last Tuesday for a minor loss.

Closed RAX shares, entry $52.17, exit $49.92, -2.24 loss
Bought to close OCT $52.50 call, entry $2.13, exit .40, +1.73 gain
Net loss = -.51



GMCR - Green Mountain Coffee (Close/Write)

GMCR fell off a cliff last week when it broke support at $75 when the market collapsed on Tuesday. All the prior momentum stocks were crushed as fund managers took profits. This completely erased any remaining premium in our short Nov $85 call. I am recommending we close that call and sell a new December call to take in additional premium.

Buy to close Nov $85 Call, entry $10.00, currently .68, +9.32 gain.
Sell Dec $77.50 call, currently $4.25. No stop



New Short Put Recommendations


None


New Covered Call Recommendations


SLCA - U.S. Silica Holdings

SLCA is the largest domestic producer of silica sand used in oil and natural gas fracking and also in other industries. The fracking boom has created a major boom in silica demand. Millions of tons of this sand are being mined and shipped all over the country to be used in fracking operations.

The stock has been on a spring the last two weeks due to a massive short squeeze. Some reports claim there are 14 million shares short out of 35 million outstanding. Institutions report owning more shares than there are outstanding which means speculators have borrowed shares to short and institutions bought them leaving the speculators with no way to cover.

I am recommending a November $35 call with the stock at $31.50. The premium is relatively low at $1.05 but if the short squeeze continues we could gain $3.50 in stock value by the November expiration.

Buy-write SLCA Nov $35 Call, currently $31.51-$1.05, no stop.

SLCA Chart


LNG - Cheniere Energy

LNG is a fledgling market in the U.S. but Cheniere is the leader. Originally they were going to import LNG back when gas in the U.S. was up in the $15 range in 2005. Now they have reversed course and they have three export terminals under construction to take advantage of the cheap gas now in the $3.80 range. Exports to Asia can be sold in the $15-$18 range.

They are in the process of building a $25 billion facility over the next five years. First export production is expected in 2015. The Sabine Pass project will consist of six trains each with the annual capacity of 4.5 million tons per annum. (mmtpa) Train 1 and 2 will cost $5.9 billion and construction is currently 30% complete. Train 3 and 4 have received all the necessary approvals and financing and construction should begin by the end of July. First production is expected in late 2016. Train 5 and 6 have seen presales of 3.75 mmtpa of LNG and regulatory approvals are underway. First production expected in 2018.

The Corpus Christi project is scheduled for 3 trains of 5.0 mmtpa each. They will export 767 Bcf per year. Bechtel is completing the front end engineering and design work and all the regulatory approvals have been requested. First production expected in 2017.

Cheniere was the only company authorized by the U.S. government to export LNG. There are roughly 20 other applications pending but clearly Cheniere is well ahead of the pack and will have an easy five year head start on any competition. Conoco and Dow Chemical received an export license in mid May but they are years away from the start of any exports.

I picked LNG as a covered call play because it has a solid growth path and the stock is cheap. It is not very volatile so we will benefit from the stock appreciation more than the premium sale. The stroke prices are in $5 increments rather than $1 steps and that is beneficial to the plan.

I would like to keep selling OTM calls on LNG as it continues to climb and do it month after month. That is always a good plan if you can find a stock that is not prone to bouts of volatility and I think that is LNG.

Buy-write LNG Jan $40 call, currently $36.61-$1.88, no stop
Profit if called = $5.27.

LNG Chart


New Aggressive Recommendations


GMCR - Green Mountain Coffee

Green Mountain sold off last week to the 200-day average at $65. The drop came on news that an analyst at SunTrust Banks sent out a note saying K-Cup sales growth declined meaningfully in September. This is his estimate not news from GMCR. He believes sales growth slowed to 5.1% in September, down from 13% in August. Whole Foods, Safeway and Kroger have started selling their own brands of K-Cup coffee in recent months. However, over the same period GMCR has announced several new product lines including Campbells soups, etc. They are also producing products for the new higher end Vue and Rivo coffee makers that also brew milk based drinks. They are also working on carbonated beverages, energy drinks, teas and juice.

Yes, there are more K-Cup sellers out there today but that is also likely to sell more K-Cup brewers as the brands and product options expand. GMCR will get some of those K-Cup sales as well.

I believe GMCR will rebound from here with the 200-day as decent support. Part of the decline last week was related to the dumping of momentum stocks by fund managers. All the big names got hit including LNKD, AMZN, NFLX, etc.

Sell Nov $65 Put, currently $3.15, stop $64.75.

GMCR Chart


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.