Even in a bull market there are pockets of volatility.

The Dow declined -77 points (.5%) to close at 16,000, the S&P lost -5 (.27%) to close at 1,800 and the Nasdaq lost -14 (.36%) to 4,045. However the Russell 2000 outdid all of them with a -1.2% drop to 1,129.

I am not concerned about the drop unless it continues for several more days. The indexes were overextended and needed a rest. Also, the Dow is normally down the first two days of December as a result of portfolio restructuring and tax loss selling. Despite the early December drop the month is the best of the year for the Dow.

Despite the sharp drop in the Dow at the close the VIX only rose +2 points since last Wednesday to close at 14.23. Relatively speaking that is not even a blip on the volatility scale.

The sharp drop in the Russell 2000 negated several potential plays today because we don't know for sure if the drop is just a dip or a sudden change in market sentiment. I believe it is temporary but I want to see proof before I jump into a group of small caps with miniscule premiums.

I prefer to stay with the higher dollar stocks where the volatility carries a big premium and gives us a little more cushion if things don't go our way. If the market does continue higher than those big put premiums decay faster.

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


IOC - Interoil Corp (Closed)

We started a new position using the December $80 put the prior week when the stock was at $90. Since then the stock had trended down and closed under $85. With oil prices weakening we could see a volatility event in IOC. This is a company where the lack of news can be a warning that the next news could be ugly. I recommended closing the play at the open last Tuesday. Fortunately IOC spike dup at the open on Tuesday and we reduced the loss on the open put to 30 cents.

Closed IOC Short Dec $80 Put, entry $3.25, exit $3.55, .30 loss.
Initial position: Short Dec $62.50 put, entry $3.50, exit .53, +2.97 gain.
Net gain $2.67.

Chart


DDD - 3D Systems (Closed)

Despite good news about a partnership with Motorola the shares of DDD declined last Monday. A decline on good news plus a lower intraday high suggested the momentum may have left DDD shares. I recommended we close the position to limit our risk.

Since then the 3D printing sector has rebounded and there was more good news today so I will be recommending a new DDD play today.

Closes DDD Dec $70 Put, entry $3.10, exit $3.41, -.31 loss.

Chart


CSIQ - Canadian Solar (Stopped)

CSIQ had a very nice trend underway and it seemed to have divorced itself from the volatility of the other solar stocks. However, CSIQ struggled all last week and then declined -6% today. I added a stop loss at $27.95 last Monday and that was hit on the gap down open on Tuesday. Fortunately the premium had shrunk significantly and we escaped with a nice profit.

CSIQ Dec $31 Cov Call, entry $2.60, exit .60, +2.00 gain.

Chart


GDX - Gold Miner ETF (Closed)

The Gold Miner ETF began to break below support at $22.50 last week and I recommended closing the position before the loss on the covered call position intensified. With the outlook for gold declining I elected to take the loss now and not try to recover it with new calls. Fortunately we were out before the -6% drop today.

Closed GDX Shares, entry $25.50, exit $21.98, -$3.52
Closed Dec $26 Call, entry $1.34, exit .11, +1.23 gain.
Net loss $2.29.

GDX Chart


VJET - Voxeljet (Stop change)

VJET got some bad press from Jim Cramer last week saying it was the most overvalued stock in the sector. He effectively killed the rally that took it from $39 to $47.50 in two days. Shares have declined back to support at $40 and I am recommending we add a stop loss.

Short Dec $40 put, add stop loss at $36.95

Chart


New Low Volatility Short Put Recommendations


None


New Covered Call Recommendations


None


New Aggressive Recommendations


DDD - 3D Systems (Short Put)

The 3D printer sector benefitted from several news events over the last several days. On Monday a company announced a full color 3D printer. Hewlett Packard said last week they would be in the space in early 2014 and that gives the sector even more credibility.

DDD has been rising since last Monday and was up today even in a bad market. That is the kind of relative strength we are looking for.

I put this play in the aggressive sector because of the recent volatility in the sector.

Sell short Jan $70 Put, currently $3.00, stop loss $69.25.

Chart


TSLA - Tesla Motors (Long Term Short Put)

I am listing this in both Long Term and Aggressive categories.

After the bell today Tesla reported that the German equivalent of the NHTSB in the U.S. had cleared Tesla from any wrong doing or manufacturing defects in the three Model S car fires. Two fires resulted from running over large chunks of metal highway debris at high rates of speed. The third fire resulted from the car crashing into concrete wall in Mexico at three times the speed thought to be survivable. All occupants walked away uninjured. Germany's KBA or Federal Motor Transport Authority said "no manufacturer defects could be found" and "no further measures" would be taken. Germany was one country where analysts thought Tesla would have regulatory challenges.

Tesla shares appear to have found a bottom at $120. That may only be temporary or it could be lasting. Shares have fallen from $195 to $115 or $80 or -40%. That definitely qualifies as a correction.

I believe we are going to see a strong short squeeze when the market begins to rally in December. All the bad news is priced into Tesla and the orders for the new Model X SUV are reportedly strong. Once news begins to leak out about Q4 sales and preorders I think TSLA will rise from the ashes.

I am recommending this as an aggressive play because of the risk of $120 failing and because I am going deep into the money on the put. There is no greater risk from being $20 in the money as there is by being $1 in the money. The additional ITM premium covers the higher strike price.

I am using the March $150 put, currently $34.25. If we were put our cost in TSLA shares would be $115.75. That is only slightly different than selling a $120 put for $15 and having a cost of $105. The difference is a potential profit of $34 compared to $15.

Sell short TSLA March $150 Put, currently $34.25, stop loss $114.75.

Chart


New Long Term Recommendations


CRR - Carbo Ceramics (Short Put)

Carbo has been very stable since the spike higher on earnings in November. Shares rocketed to $120 and then stayed there despite the market volatility and the five month low in oil prices. Over the last two days the stock has started to tick higher and could be on the verge of breaking over resistance at $125. I would not normally recommend a stock this expensive but the stability factor won me over.

I am recommending a March $115 option, which is below the support from the last six weeks. I expect to close this position before their earnings in February. Once into 2014 the March premiums should decline rapidly and if the uptick continues the shares could be over $130 by January.

Sell short CRR Mar $115 put, currently $7.30, stop $117.25.

Chart


TSLA - Tesla Motors (Long Term Short Put)

I am listing this in both Long Term and Aggressive categories.

After the bell today Tesla reported that the German equivalent of the NHTSB in the U.S. had cleared Tesla from any wrong doing or manufacturing defects in the three Model S car fires. Two fires resulted from running over large chunks of metal highway debris at high rates of speed. The third fire resulted from the car crashing into concrete wall in Mexico at three times the speed thought to be survivable. All occupants walked away uninjured. Germany's KBA or Federal Motor Transport Authority said "no manufacturer defects could be found" and "no further measures" would be taken. Germany was one country where analysts thought Tesla would have regulatory challenges.

Tesla shares appear to have found a bottom at $120. That may only be temporary or it could be lasting. Shares have fallen from $195 to $115 or $80 or -40%. That definitely qualifies as a correction.

I believe we are going to see a strong short squeeze when the market begins to rally in December. All the bad news is priced into Tesla and the orders for the new Model X SUV are reportedly strong. Once news begins to leak out about Q4 sales and preorders I think TSLA will rise from the ashes.

I am recommending this as an aggressive play because of the risk of $120 failing and because I am going deep into the money on the put. There is no greater risk from being $20 in the money as there is by being $1 in the money. The additional ITM premium covers the higher strike price.

I am using the March $150 put, currently $34.25. If we were put our cost in TSLA shares would be $115.75. That is only slightly different than selling a $120 put for $15 and having a cost of $105. The difference is a potential profit of $34 compared to $15.

Sell short TSLA March $150 Put, currently $34.25, stop loss $114.75.

Chart


Existing Play Recommendations


Links to original play recommendation

PHM - Pulte Homes (Covered Call)

PHM - Pulte Homes (CC Update)

CZR - Caesar Ent (Covered Call #1)

GMCR - Green Mountain Coffee (Covered Call)

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

LNG - Cheniere Energy (Covered Call)

GDX - Gold Miners ETF (Covered Call)

CZR - Caesar Ent (Covered Call #2)

RH - Restoration Hardware (Short Put)

IOC - Interoil Corp (Short Put)

DDD - 3D Systems (Short Put)

FSLR - First Solar (Short Put)

INTU - Intuit (Covered Call)

IOC - Interoil Corp (Short Put 2)

SLCA - U.S. Silica Holdings (Covered Call 2)

JCP - JC Penny (Short Put)

INCY - Incyte (Covered Call)

NLNK - Newlink Genetics (Covered Call)

CSIQ - Canadian Solar (Covered Call)

VJET - Voxeljet (Short Put)

SRPT - Sarepta Therapeutics (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.