Despite the lightest volume in two weeks the market internals were strong.

The earnings cycle is running its course and we are about out of the reporting season. Those that have not reported are dwindling but still enough to disqualify about 35% of the available candidates for premium selling.

The ones that have reported have either soared to new highs where selling premium would be dangerous or sunk to new lows and we would not want to sell premiums on those stocks.

I had to reach to find anything I was comfortable playing this week. Sectors with solid trends have no material premiums. The VIX has fallen to a three week low at 12.93 and very close to a three-month low. It is hard to find decent put premiums in that environment.

If you have any specific plays you would like to suggest please send them to me. I am not bashful about using your ideas. As long as we can all make money it does not matter where the ideas come from.

Jim Brown

Send Jim an email



Current Portfolio


Current positions

Covered Calls

Long Term Positions - None


Current Position Changes


None


New Short Put Recommendations


NUS - NuSkin

NuSkin posted strong earnings on October 22nd and gapped higher only to give it all back intraday. It took four days for the stock to recover and now it is on the verge of setting a new high again. There is no weakness in the stock and all the fundamentals are good. NuSkin has found new life after a three month stair step consolidation. The stock is expensive but it has already reported earnings and the trend is good.

Sell short NUS Jan $110 put, currently $4.80, stop loss $113.25

NUS Chart


New Covered Call Recommendations


None


New Aggressive Recommendations


SCTY - Solar City

First Solar blew away earnings this week and rallied about $12 on the news even though they were weak on guidance. Solar City has earnings on Wednesday. The combination of impending earnings and the spike on the FSLR news has really inflated SCTY option premiums.

I believe SCTY has a better business model than FSLR but they are really in a different business. Solar City installs systems on buildings and either sells/leases the systems to the owner or they sign a long term power agreement where SCTY owns the systems and profits from the power generated.

SCTY has installed nearly 200 systems for Wal-Mart and the retailer has more than 11,000 locations. This is a win-win for both parties. Wal-Mart gets cheap power and SCTY gets a long term income stream. They both say good things about the other and SCTY is sure to install hundreds more and this is only one of their large commercial customers.

The SCTY business model is less susceptible to the ups and downs of the solar industry. They benefit from the lower prices for solar panels where FSLR suffers when the prices decline.

I am taking the rare opportunity to recommend a short put on SCTY ahead of earnings because the premiums are so high. SCTY is at $61. An aggressive investor could go out to the January options and sell the $60 strike for $8. That means you are protected down to $52 on a SCTY drop. However, should they surprise on earnings and spike higher that is a very nice premium to keep.

I am going to take a less aggressive approach and use the December $52.50 strike that is currently $3.10. If disaster strikes that is $8 below the closing price. That would be about a 12% move in the stock. The time frame is shorter so we don't have to worry about end of year or early January tax moves that could prompt sales in high flyers.

Sell short SCTY Dec $52.50 Put, currently $3.10, no stop.

SCTY 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 #1)

GMCR - Green Mountain Coffee (Covered Call)

SLCA - U.S. Silica Holdings (Covered Call)

LNG - Cheniere Energy (Covered Call)

YOKU - Youku Toudou (Covered Call)

GDX - Gold Miners ETF (Covered Call)

CZR - Caesar Ent (Covered Call #2)

RH - Restoration Hardware (Short Put)

IOC - Interoil Corp (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.