We eased past the January expiration hurdle but the next one in our path is earnings.

We were fortunate to exit several plays last week ahead of expiration and we were called away on several more. Only one resulted in a loss and that was Pulte Home. We have been writing calls on PHM since May and the stock collapsed in June. We were not able to exit for a profit when we were finally called but we definitely reduced our loss significantly.

Now that expiration is behind us the next problem is earnings. This is that point in the quarter where 65% of companies report their earnings over the next two weeks. That means very few candidates for new plays. I rarely want to sell a put the week before earnings because the results can be catastrophic.

I tried to pick several stocks that would be somewhat immune to earnings and where the dates were a little farther out. That gives us some time for premiums to deflate and then make a decision on a pre-earnings exit or not.

I suggested last week we close the short put on ILMN with an 11 cent premium and only four days until expiration. Taking that risk off the table turned out to be a wasted exercise. ILMN rallied another $16 by Friday. However, it could have gone the other way. It is always better to be safe than sorry.

For instance in the case of NuSkin I recommended closing it on Tuesday because the stock was acting strangely and had moved closer to our strike at $135. That turned out to be the right move because NUS plunged $57 from Wednesday's open to Friday's close. I am sure glad we did not have an open position on Wednesday.

Jim Brown

Send Jim an email



Current Portfolio


Current positions

Covered Calls

Long Term Positions


Current Position Changes


NUS - NuSkin (Closed)

We dodged a fatal bullet last week when I recommended closing the Nuskin position at the open on Tuesday. On Wednesday morning a rumor of an investigation by China into possible pyramid scheme activities knocked -$12 off the stock. On Thursday the Chinese government confirmed the investigation and NUS lost another $25. By Friday's close Nuskin had lost -$57.

Closed: Short Jan $135 put, entry $2.72, exit $1.65, +1.07 gain.

Chart


ILMN - Illumina (Closed)

The put premium had declined to 11 cents and there was nothing to be gained by leaving this position open. I recommended we close the position. The worry about future risk was unfounded and ILMN rallied another 16 points by Friday's close.

Closed: Short Jan $95 put, entry $2.45, exit .23, +2.22 gain.

Chart


PHM - Pulte Homes (Called)

We started writing calls on Pulte in May and wrote four calls before being called away on Friday. Pulte had declined -$3 since we started writing the calls. The final one was an $18 call in January. We were forced by the falling stock price to keep writing calls at lower strikes until the stock rebounded to take us out.

Closed PHM shares, entry $22.67, exit $18, -4.67 loss.
Closed June $23 Call, entry .89, exit .07, +.82 gain.
Closed July $22 Call, entry .50, exit .07, +.43 gain.
Closed Aug $21 Call, entry .54, exit .02, +.52 gain.
Called Jan $18 Call, entry .85, called, +.85 gain.
Net loss = -$1.92

Chart


LNG - Cheniere Energy (Called)

We had a short $40 call for January and Cheniere closed at $45.93 to take us out of the position with a nice gain.

LNG Shares, entry $36.57, exit $40.00, +3.43 gain
Short Jan $40 call, entry $1.80, called, +1.80 gain.
Net gain = $5.23

Chart


INTU - Intuit (Called)

We had a January $75 call that we wrote when INTU was $72.20. The stock closed at $76.99 on Friday to see us called away for a nice gain.

INTU shares, entry $72.20, exit $75.00, +$2.80 gain
Jan $75 call, entry $1.20, called, +1.20 gain.
Net gain = +4.00.

Chart


New Short Put Recommendations


None


New Covered Call Recommendations


BBRY - Blackberry

Fortunes have changed for BlackBerry after the new CEO took over and changed the focus of the business. BBRY announced a deal with Foxconn Technology to outsource the hardware business to the same company that makes iPhones for Apple. This would free up Blackberry to focus entirely on services and winning back the enterprise market. Shares have risen +45% since that news.

On Friday Citron Research said the stock was undervalued and put a $15 price target on it. Shares spiked another 6% on Friday.

I considered writing a long term call on BBRY but I am not sure the good feelings about the stock will hold. I will be content to write a short term call and try to capture a 15% return in the next month. If the euphoria fails to hold we can repeat the process in March.

Earnings March 21st.

Buy-write BBRY February $10 call, currently $9.09-.31, no stop.

BBRY Chart


New Aggressive Recommendations


HLF - Herbalife (Short Put)

Nuskin was crushed last week on the investigation by China into its sales practices. Herbalife was knocked for a $10 loss on guilt by association. I believe both will pull through because they have been fighting these challenges for 30 years. This is not new.

Herbalife is not currently under investigation in China. That is always a possibility but I am willing to take the risk because the premiums are huge.

I am going to recommend a May $60 put at $8.00. That is $10 under the current price and under very strong support. There is no such thing as a perfectly safe position so I am listing this under the aggressive recommendations.

Earnings Feb 18th.

Sell short HLF May $60 Put, currently $8.00. stop $64.75.

HLF Chart


New Long Term Recommendations


GILD - Gilead Sciences (Call or Put)

The news surrounding Gilead is nothing but positive. Their drugs are getting approved and good news is breaking out all over. On Friday the EU approved Gilead's drug for Hepatitis C and analysts were falling all over themselves to raise the price targets. Some believe it could rise another 50% this year after a 100% gain in 2013.

I am going to recommend this two ways. As a covered call we can get $3.30 in premium for the March $80 call, plus $1.60 in stock appreciation. As a short put we can get $4.80 in premium for the $80 put. Some people like the calls and some like the puts. Take your pick.

I am listing the $80 strikes but put sellers might want to step up one level to the $82.50 strike for a little extra premium. The risk is the same.

Earnings Feb 4th.

Buy-write GILD Mar $80 call, currently $78.04-$3.30

Alternate position:

Sell short GILD Mar $80 Put, currently $4.80, 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)

TSLA - Tesla Motors (Long Term Short Put)

ILMN - Illumina (Aggressive Short Put)

BA - Boeing (Aggressive Short Put)

INCY - Incyte (Covered Call)

TAN - Solar ETF (Long Term 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.