With 2014 starting off in the opposite direction than analysts expected we need to reduce our risk.

Last week I wrote that the market may go straight up as everyone expects based on seasonal trends BUT we needed to maintain a defensive posture in case the consensus expectations did not come to pass.

The market has not started off this week since 2009 when we were in the depths of the recession and heading for the generational low of 666 on the S&P in March of 2009.

I have been expecting a start more like 2010 when the S&P gained +35 points through January 19th and then gave back -84 in late January and early February.

So far the selling has been weak but volume increased today to 6.5 billion shares. Two attempts at a rally were quickly sold and the indexes ended near the lows of the day.

We don't have a major sell off in progress and the S&P has only lost -21 points over the last three days, which is just barely -1%. I said last week "if we could get a decent -5% or greater dip to inflate premiums I would back up the truck" to add positions. While we are headed in the right direction we are a long way from that goal.

Selling premium is a strategy for a bull market. Until we find support the best strategy is to reduce our risk and save our capital in hopes of a better entry point.

I did add a couple of plays so there are opportunities if you want to take them.

Jim Brown

Send Jim an email



Current Portfolio


Current positions

Covered Calls

Long Term Positions


Current Position Changes


HLF - Herbalife (Stopped)

The FTC announced on Friday they were going to hold a press conference on Tuesday to discuss a new attack on fraudulent advertisements for diet products. They did not mention a company and of course all the major nutritional supplement companies imploded on the news. Herbalife lost -$4 on the news to stop us out at $76.50. Fortunately the put had already declined in value and we exited with a profit.

Closed HLF Short Jan $75 put, entry $5.06, exit $2.74, +2.32 gain.

Chart


NLNK - NewLink Genetics (Closed put)

Newlink lost its momentum with a sharp drop on the prior Friday. We were not in danger but I recommended we take profits and close the play now. With only 40 cents left on the put premium there was not that much left to gain.

That turned out to be the right move as NLNK collapsed -$2 on Jan-2nd.

Closed JAN $17.50 Put, entry $1.45, exit .45, +1.00 gain.

Chart


NLNK - NewLink Genetics (Closed call)

The January 2nd drop in NewLink stopped us out at $22.25 for a small loss. I rarely put stop losses on covered calls but in the case of NLNK it was the right move.

Closed NLNK shares, entry $23.71, exit $22.25, -1.46
Closed Jan #22.50 Call, entry $2.85, exit $1.95, +.90
Net loss .56 cents.

Chart


SRPT - Sareota Therapeutics (Close)

SRPT lost -8% on Monday and while we are still well out of the money at $16 I am recommending we close the position to reduce our risk.

Buy to close Jan $16 put, entry $1.55, currently .35, +1.20 gain.

Chart


DE - Deere & Co (Close)

Deere closed at a two week low on Monday and could decline further if the market continues to weaken. I am recommending we close the position to capture our profit and reduce our risk.

Buy to close Jan $90 put, entry $2.75, currently $1.02, +1.73 gain

Chart


NUS - NuSkin (Update)

Nuskin fell with the rest of the nutritional supplement companies on Friday and I did not have a stop in place. The short $135 put is underwater by about $2 and premiums are high because of the impending FTC press conference. If the FTC is targeting the over the counter diet pill market then NUS should recover quickly. Multiple analysts have recommending buying this dip if the FTC news does not mention them by name.

I am recommending we continue to hold this put since expiration is only 9 days away. The excess premium will evaporate very quickly if they are not targeted by the FTC.

Short Jan $135 put, entry $2.72, currently $5.20, -2.48 potential loss.

Chart


New Short Put Recommendations


None


New Covered Call Recommendations


None


New Aggressive Recommendations


TWTR - Twitter

You either love Twitter or hate it and there are dozens of analysts on both sides of the coin. Twitter has yet to report earnings as a public company. That earnings report is due out on February 6th. I am recommending we sell the February $55 put and then exit the position before the earnings report. They could move $20 on the 7th depending on what they say on earnings.

If the market turns bullish before then we could see TWTR at new highs.

Sell short TWTR Feb $55 put, currently $3.90. stop $59.50

Chart


New Long Term Recommendations


TAN - Solar ETF

The easiest way to avoid the earnings pitfalls is to use an ETF as the underlying vehicle. The solar stocks have been pushing higher with the exception of FSLR on Monday. Goldman downgraded them to a sell. This deflated the sector slightly but the TAN ETF still closed with a gain for the day.

I am recommending an April $35 short put on TAN, currently $2.10. If you wanted to be a little more aggressive you could write the $40 call for $2.30 and earn about $4 if called. I prefer the lower margin on the put even though the profit is less.

I believe this is a low risk play. Solar stocks are starting to be recognized as panel prices come down to the point where they are economical for smaller users and the ETF should continue to rise.

Lastly, the ETF respected the 100-day average for the entire month of December. That is the $35 level and should be strong support.

Sell short April $35 Put, currently $2.10, no stop.

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)

CZR - Caesar Ent (Covered Call #2)

CZR - Caesar Ent (Covered Call #3)

LNG - Cheniere Energy (Covered Call)

INTU - Intuit (Covered Call)

SRPT - Sarepta Therapeutics (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)

NLNK - Newlink Genetics (Covered Call)

INCY - Incyte (Covered Call)


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.