With the markets at new highs going into year-end we have the potential for a major counter move in early January.
We are faced with the potential for a January dip given the sharp rally since the FOMC meeting. The flood of money into big caps and ignoring small caps is a symptom of fund managers parking cash until January. They don't want it on their year-end statements so they put it in highly liquid big cap stocks. After the inflow of retirement money at year-end they can quickly sell those stocks to rebuild the cash position and be ready for the next buying opportunity.
The surge of post FOMC money into the market has forced the Volatility index to a six week low at 12.0 and crushed the available option premiums. The bullish trend has removed the majority of plays from consideration. I don't want to write a 75 cent option on a $50 stock because the risk is too great.
The only way I could see to get any decent put premiums today was to stretch out to the March options and that is dangerous because of the weak expectations for the Q4 earnings.
I looked at writing options on Twitter (TWTR) today given the extreme increase in volume and volatility on Twitter but the spreads were $2-$3 in some cases. The deep in the money calls were trading at less than intrinsic value and the put premiums were far too small for the implied risk. Sometimes there is no play.
I elected to only add a couple of plays using the Keep It Simple Stupid (KISS) method. There is always another rally to trade if you have capital to invest.
I apologize for not sending a newsletter on Monday evening. I have been laid up in bed since last Wednesday and I am just now reentering the land of the living.
Send Jim an email
Long Term Positions
Current Position Changes
GMCR - Green Mountain Coffee (Closed)
We started the play on GMCR with a November $85 covered call for a $10 premium. GMCR remained volatile and we were not called. We resold a December $77.50 call for $4.34 and when GMCR declined we closed it and rewrote a December option using the $65 call. Unfortunately GMCR rebounded strongly from $65 to $75 in the December period and we were called out on the $65 strike. That left us with a large loss on the stock from the initial entry but we did break even on the overall trade. The risk in writing covered calls is that sometimes there is a news event that knocks the stock for a loop and when you try to recover those losses by writing calls at a lower level it goes against you.
Closed GMCR Short Dec $65 Call, entry $3.26, called +3.26 gain.
Closed GMCR shares, entry $79.81, called $65, -14.81 loss
Previously closed Nov $85 call, entry $10.00, exit 0.66, +9.34 gain
Previously closed Dec $77.5 call, entry $4.34, exit 0.85, +3.49 gain
Net gain 3.26 +9.34 +3.49 -14.81 = +1.28
DDD - 3D Systems (Close)
3D Systems has accelerated from the $77 level where we launched this play to close at $92 today. The January put has declined to .35 and there is no longer any reason to continue holding this risk. Let's close this play and pocket the profits.
Close DDD short Jan $70 Put, entry $2.70, currently .35, +2.35 gain
HLF - Herbalife (Add stop)
Herbalife rallied to 81.75 after the re-audit news and has held most of its gains. However, the last two days it has failed to participate in the rally. I am adding a stop loss at $75.85 just in case the bottom falls out.
Short Jan $75 put, add strop loss at $75.85
CZR - Caesars (Close/Write call)
The Caesar play started out with an Oct $25 covered call and the stock fell sharply to put us in a deficit position. We wrote a January $20 call with the stock just over $19. A rebound has appeared and CZR is crossing above $21. Since we are deficit in the stock position I want to close that January $20 call for a small loss and rewrite a longer call to allow us to capture the appreciation in the stock price and rescue the position. By moving to a higher strike we can add $2.50 in stock appreciation.
Close CZR Jan $20 call, entry $1.30, currently $1.75, -.45 loss.
Sell to open March $22.50 call, currently $1.55, no stop.
INCY - Incyte (Called)
INCY shares rallied to $50 on Friday to see our December $45 call exercised and the position closed. This was a successful ITM call play. INCY was $47 when we sold the call for $3.75. That gave us a lot of protection in the choppy November market. I would like to find more deep in the money calls to write but they are few and far between.
Closed INCY shares, entry $47.04, exit $45.00, -2.04 loss
Closed Dec $45 Call, entry $3.75, called, +3.75 gain
Net gain +1.71
NLNK - NewLink (Called)
NewLink Genetics has gone vertical with a strong gain over the last month. The short dip at the beginning of December was quickly erased. We wrote the Dec $17.50 call and the stock is now trading at $23.50.
Closed NLNK shares, entry $17.96, exit $17.50, -.46 loss
Closed NLNK Dec $17.50 call, entry $2.05, called +2.05 gain.
Net gain +$1.59.
TSLA - Tesla Motors (Update)
News that the Model S kept its five star safety rating, new sales in China and speculation that GM or Ford could make a bid for Tesla in 2014 has boosted the share price this week. Everything appears to be going according to plan for our aggressive March $150 put. We entered the play with TSLA at $132 and it closed at $155 today. The $28.30 put premium has already declined to $15.66 and we have three months to go. I am very happy with this play and look to add more of this type in the future.
New Short Put Recommendations
New Covered Call Recommendations
INCY - Incyte Corp
We were just called away from a position on INCY and the stock has a decent uptrend. I am using an in the money call to get us the most premium and protect against a January dip. The premium on INCY is $4.40 and that is nearly 10% of the stock price.
Buy-Write INCY Feb $50 Call, currently $50.68-$4.40, No stop.
We were just called away from a NewLink position and with the stock in a strong uptrend and decent option premiums I see no reason to not repeat the trade.
Buy-write NLNK Jan $22.50 call, currently $23.50-$2.10, no stop
CZR - Caesars
We already have a CZR call that is being rolled out to a higher strike tomorrow. However, for those not in the current CZR play this is an opportunity to launch a new play with CZR about to break over $21 resistance.
Buy-Write March $22.50 call, currently $21.11-$1.55, no stop.
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)
CZR - Caesar Ent (Covered Call #1)
CZR - Caesar Ent (Covered Call #2)
GMCR - Green Mountain Coffee (Covered Call)
SLCA - U.S. Silica Holdings (Covered Call)
LNG - Cheniere Energy (Covered Call)
INTU - Intuit (Covered Call)
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)
NLNK - Newlink Genetics (Short Put)
ILMN - Illumina (Aggressive Short Put)
DE - John Deere & Co (Short Put)
BA - Boeing (Aggressive Short Put)
HLF - Herbalife (Aggressive Short Put)
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.