This is the worst option expiration cycle of the quarter.
More than 50% of the S&P report earnings over the next two weeks. Nearly all the S&P will have reported over the next four weeks. Extrapolate to the rest of the stock universe and nearly all of the stocks that have not already reported will report before the November 15th option expiration.
For our purposes we do not want to hold our positions open over an earnings event. Bad things tend to happen to option writers when they hold over earnings. Either the company misses estimates and the stock implodes or they beat estimates and the stock spikes. If we knew for sure which company would do what we could load up on the winners. Unfortunately my crystal ball is not very accurate in those predictions. Even the best companies tend to miss when I have an open position.
I looked at more than 400 companies this week for options to write and more than 350 had earnings in the November option cycle. That makes picking stocks in the November cycle very difficult.
The majority of the ones that had either already reported or reported in the December cycle had crummy charts or no material premiums to sell. To make matters worse the market has rallied for two weeks and momentum is fading.
I settled on an ETF and a Chinese Internet Television stock as the only plays this week. I simply could not find anything I was willing to put my money in and if I would not do it I would not recommend it to my readers.
This earnings confusion happens once a quarter and we just have to tough it out until the reporting cycle passes.
Send Jim an email
Long Term Positions - None
Current Position Changes
GMCR - Green Mountain Coffee (Close short put)
Green Mountain sold off the prior week to the 200-day average at $65. I recommended the aggressive short put thinking the selling was overdone and the 200-day average would be support. Shares had ticked higher for three days since the low on the 10th. I was wrong.
Whole Foods Markets (WFM) announced they were going to be selling their own brand of K-cup coffees in their stores. A couple analysts jumped on the bandwagon and the downhill ride became an express. I personally believe GMCR will recover. Whole Foods only has 365 stores compared to the thousands of stores that sell the Green Mountain branded K-cups. Seriously a dozen Wal-Mart stores probably sells more K-cups than all 365 Whole Foods stores combined. My local Super Wal-Mart has about 20 feet of top to bottom shelf space for K-cups and there are always people jostling for position to snag their favorite blend.
However, we can be personally positive on the outlook for a stock but the market may not feel the same way. We can be confident in our opinion and still lose money.
For that reason I am recommending we close the aggressive put before any further damage is done.
Close GMCR Nov $65 Put, entry $3.10, currently $4.85, -1.75 loss.
CZR - Caesars (Covered Call)
Caesars shares took a hit on the 15th as the subscription right vested for shares of CAC. Holders on the 14th can buy a share of CAC for $8.64 prior to the close of business on November 5th. There was a dip of about $2 when the rights date passed on the 15th.
On Friday the company said it pulled out of a joint venture with Suffolk Downs to build a casino in Massachusetts. Caesars said the licensing requirements were "unprecedented" and withdrew its application to build in the state. Wynn Resorts and MGM Resorts are also bidding for a Massachusetts license and Caesars said they expected those companies to have a very difficult time tolerating the environment the commission has created. The problem appears to affect those casino operators with locations in multiple states. Apparently the commission is putting strict requirements on those types of firms.
The company also said it had ended a $185 million partnership with New York based Gansevoort Hotel Group to convert Bill's Gambling Hall in Las Vegas to a boutique hotel using the Gansevoort name.
The problem stemmed from an investor in Gansevoort being named in German court filings as having ties to organized crime in Russia.
The company said its Desert Palace subsidiary was being investigated by federal officials for possible money laundering. Caesars said it was cooperating with officials.
The double whammy to Caesars stock over the last week was painful. Rather than wait for a new uptrend to begin I am going to reach out to the January expirations for the $20 call. If we are called we will lose a few cents but if not called we will then be in a position to return to profitability. We received $2.37 on the first call we sold.
Sell short CZR Jan $20 Call, currently $1.50, no stop.
New Short Put Recommendations
New Covered Call Recommendations
GDX - Gold Miners ETF
Gold has been tanking as the Armageddon trade fades into the sunset. However, the prospect for the Fed to continue QE well into 2014, possibly until June, has rekindled the interest in precious metals. The gold miners ETF is currently pressing up to resistance at $25. On both of the big declines in gold the GDX honored support at $23. I feel the worst is over as we enter the holiday season and a typical buying season for gold.
I am recommending the December $26 strike, currently $1.05. If called we will make $2.12 on the trade. If not called we will write another call.
Buy write GDX Dec $26 Call, currently $24.93-$1.05, no stop.
YOKU - Youku Toudou (Covered Call)
Youku Toudou is an Internet Television company in China. Its platform enables consumers to search, view and share video content across various devices. The web content library consists primarily of professionally prroduced content, television series, movies, current events, news, variety shows and music videos. Mobile viewers have risen to nearly 50% of the total views.
The stock set a new high on Oct 7th and then declined sharply on the various economic headlines impacting Chinese stocks over the last two weeks. Shares pulled to within 50 cents of those prior highs on Monday.
Earnings Nov 29th and I am recommending a November $31 strike, currently $2.05 so we can be out before the earnings report.
Buy write YOKU Nov $31 Call, currently $30.49-$2.05, stop $27.65
New Aggressive Recommendations
New Long Term Recommendations
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)
GMCR - Green Mountain Coffee (Covered Call)
GMCR - Green Mountain Coffee (Aggressive Short Put)
SLCA - U.S. Silica Holdings (Covered Call)
LNG - Cheniere Energy (Covered Call)
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.