I received numerous reader comments from last week's newsletter and I was thrilled at the response.

Last week I asked everyone to email me with what type of plays you wanted me to profile in the Option Writer newsletter. Almost every response was to continue writing higher dollar stocks with big option premiums. Nearly everyone agreed that taking in several dollars in premium help to offset the risk of an unexpected event.

The beauty of playing higher dollar momentum stocks is that they tend to keep moving where the lower dollar stocks seem to have a choppy pattern and are more reactive to the market.

Not everyone wanted high dollar stocks and I will try to accommodate your requests. However, the lower dollar threshold seemed to be $20 stocks with $1 in premium. Those are very hard to find unless you go out several months in the strike and that increases your risk. A $20 stock typically has about a 50 cent premium and that is hardly any protection against an unexpected decline. Obviously declines in $20 stocks are rarely in multiple dollar increments so there is a tradeoff there as well. I will continue to try and find acceptable candidates in that range as well.

I am starting to be concerned about what January will bring. There is an increased possibility of a Fed taper so that cloud will be with us once we get past the Wednesday decision this week.

Secondly I am afraid the Q4 earnings could surprise to the downside. With the ratio of negative warnings to positive guidance at record highs there will be plenty of earnings misses.

Thirdly, the weakness in the first half of December suggests we could see some wholesale dumping of stocks and portfolio rebalancing in January.

Because of these concerns I am hesitant to load up too many plays over the next couple weeks. We are going to lose some positions to the December expiration cycle and quite a few more to the January cycle. I will be glad to see the portfolio shrink as we head into 2014.

As a trader I would be cautious about your existing positions as we near year end. There is always another rally to trade if you have capital to invest.

Jim Brown

Send Jim an email



Current Portfolio


Current positions

Covered Calls

Long Term Positions


Current Position Changes


NUS - NuSkin (Stopped)

Nuskin dropped to $125.17 on the 11th to stop us out at $126.75. I had put a tight stop on it because of the challenges with Herbalife and the Ackman short battle. Whatever impacts HLF negatively could also impact NUS. I would rather be out with a small loss on a high dollar stock than end up an owner $20 lower. In this case Nuskin rebounded the next day and closed at a new high on Monday as a result of news from Herbalife. They finished their re-audit and no problems were found.

Closed NUS Short Jan $125 Put, entry $3.50, exit $4.60, -1.10 loss

Chart


SLCA - U.S. Silica (Close)

SLCA tried to make a new high last week at $36 and failed and then rolled over to fall back and retest support at $32. This is the fourth test of $32 over the last two months and when SLCA did not participate in the rally today I decided to close the play. We are still profitable although only barely. The -$4 drop over the last five days has killed the play.

Close SLCA shares entry $31.47, currently $32.25, +.78 gain.
Close short Jan $35 Call, entry $1.30, currently .50, +.80 gain.
Previously closed Nov $35 call, entry $1.00, expired, +1.00 gain
Net gain $2.58

Chart


RH - Restoration Hardware (Closed)

Restoration actually dipped to our stop at $68.75 the 9th and I overlooked it in the last newsletter. Shares continued declining as the momentum plays in the housing sector all rolled over.

Closed Dec $65 put, entry $2.85, exit $2.19, +.66 gain.

Chart


CRR - Carbo Ceramics (Stopped)

The biggest loss of the week came from Carbo Ceramics. They suffered the same decline as SLCA as the fracking sector received some bad press about lower volumes over the winter months. Carbo dropped -$10 in three days to stop us out at $117.25.

Closed Short Mar $115 Put, entry $7.00, exit $9.50, -2.50 loss.

Chart


New Short Put Recommendations


DE - Deere & Co

In the world of stock buybacks Deere is king. Deere just authorized another $8 billion in stock buybacks in addition to the $1 billion remaining on the prior buyback. That means there is now an authorization for $9 billion in share repurchases for a company with a market cap of $33 billion. That means they are going to buyback 27% of the company's stock. Obviously it will not happen all at once but that is considerable support for a company in the tractor business. They also announced a regular quarterly dividend of 51 cents to be paid Feb 3rd.

When a company goes to these extremes to return cash to shareholders the shares rarely go down. Since the buyback announcement on the 4th the trajectory has been sharply higher and I believe it will continue to go higher. Funds are looking for solid companies to buy for 2014 and this is the kind of win-win situation they are looking for.

Option premiums on Deere are cheap. That means we need to be a little creative to capture a higher premium. Since Deere has the wind at its back and plenty of institutional buyers I am going to recommend an in the money option. With Deere at $88.87 I am recommending the $90 strike. There is no more risk at the $90 strike than the $85 because the premium is greater to offset the amount in the money.

Sell short DE Jan $90 Put, currently $2.75, no stop.

Chart


New Covered Call Recommendations


None


New Aggressive Recommendations


BA - Boeing (Short Put)

After the bell today Boeing announced it was boosting its buyback plan by $10 billion and is raising the quarterly dividend by 50% to 73 cents. The buyback plan is in addition to $800 million still unspent in the prior authorization. The company said it would begin purchasing shares in January and continue for the next two years. The combination of these new shareholder friendly initiatives suggests there will be a floor under BA shares for the near future.

The stock spiked to $137 in afterhours trading.

I am going to recommend an aggressive position in Boeing. It has been trading between $131-$135 for the last month. This news should break it out of that pattern and push it higher. I am going to recommend we short the February $135 put, currently $5.65 but it will be less at the open on Tuesday. If the shares open up much higher than $137 I would not have any problem with selling the $140 strike because I have confidence in Boeing's market direction.

Sell short BA Feb $135 Put, currently $5.65, no stop.

Chart


HLF - Herbalife (Short Put)

Right at the close today Herbalife announced the results of the re-audit by PriceWaterhouseCoopers. Their prior auditor KPMG was forced to resign unexpectedly after an executive was charged with insider trading.

The audit for 2010, 2011, 2012 and part of 2013 was clean and contained no material changes to the prior audits by KPMG. This is significant because Bill Ackman had sent the auditors a 52 page document telling them what to look for and why the accounting was suspect. PWC found no evidence of the Ackman claims.

The company started talking about a share buyback in Q1 now that the clouds have lifted. Carl Icahn was quick to jump on the news saying Herbalife is still significantly undervalued. He has a 16.8% stake in the company. Icahn is talking about having the company do a tender offer for shares in Q1. This is a big blow to Bill Ackman and although he still claims Herbalife is going to zero hi position is becoming more unstable every day.

With the audit out of the way and no material changes to the last three years we should see Herbalife shares move higher. The stock was halted for news pending but spiked $7 to close at $75.85 in afterhours.

I am recommending the January $75 puts, currently $5.45. They will be cheaper at the open. If it looks like HLF shares are going to open over $80 I would raise the strike to the $80 strike.

Sell short HLF Jan $75 Put, currently $5.45. No stop until the volatility eases.

Chart


New Long Term Recommendations


None


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)

CZR - Caesar Ent (Covered Call #2)

INTU - Intuit (Covered Call)

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

INCY - Incyte (Covered Call)

NLNK - Newlink Genetics (Covered Call)

SRPT - Sarepta Therapeutics (Short Put)

DDD - 3D Systems (Aggressive Short Put)

TSLA - Tesla Motors (Long Term Short Put)

CRR - Carbo Ceramics (Long Term Short Put)

NLNK - Newlink Genetics (Short Put)

NUS - NuSkin (Aggressive Short Put)

ILMN - Illumina (Aggressive 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.