Despite gains by the S&P and Nasdaq on all but two days in December the market direction is still undecided.

The Russell, Nasdaq and S&P were positive on Friday but the Dow, NYSE Composite and the Dow Transports were negative. This mixed market has an upward bias but movement is so slow it is giving the bears plenty of hope.

The Dow has traded in less than a 100-point range for the last eleven days. You have to go back to 1996 to beat that streak.

There are plenty of expectations priced into the market and nothing new in the pipeline to provide additional lift. Funds should have already completed their end of year portfolio shuffling and put their trading rooms on autopilot. We will probably see an effort to window dress for the final print of the year but I suspect it will be lackluster.

It will be up to retail traders to push the indexes higher by spending their year-end bonuses in the stock market.

The European debt crisis is still with us although it should die down over the next two weeks as Europe takes off for the holidays. News will be muted but it will pickup again in January.

We had an interesting event last week on FCX. The stock went ex-dividend and all the option strikes were reduced by $1. Several readers emailed in a panic because the $105 strike we were holding suddenly disappeared from their portfolios. It was replaced with a $104 strike. If you were short this $105 put you are now short the $104 put. Nothing really changed for us other than the premium declined and the strike is a little farther away from the stock price and obviously a move in our favor. The stop loss remains the same at $109.50.

The $1 dividend on FCX was a non-event as far as we are concerned. On stocks with larger dividends it can cause havoc in option pricing. For instance OptionsXpress (OXPS) declared a $4.50 dividend payable on Dec-27th. On a $20 stock that means the strike prices are going to drop nearly $5. So will the stock when it goes ex-dividend.

On a normal dividend the ex-dividend date is two days before the record date. The record date on FCX is the 20th so two trading days before meant the change in strikes was on Thursday.

On a large dividend like OXPS there are special rules. On the Nasdaq when a company issues a special dividend of 25% or more the ex-dividend date is the first business day following the payable date. The different rules always cause confusion.

Strike prices have to change in order to allow for the repricing of the stock ex-dividend. For instance Diamond Hill (DHIL) issued a $13 dividend in November. The stock closed at $85 the day before the ex-date and opened at $69 the day after. If DHIL had options and you had been long or short an $80 put the strike would have changed to $67.

If a company does a stock dividend, for instance a 2:1 split, the strikes are cut in half. A $50 put becomes a $25 put. When a company does something strange like a 5:4 or 3:2 split the strikes can change or the number of shares per contract changes. On a 3:2 the resulting contract is for 150 shares instead of 100. Since there is no rule on how a company can split its stock the exchanges had to come up with some formulas on how they were going to deal with stock dividends.

As the year draws to a close we should see a bullish bias in the market BUT there is no guarantee. The markets are up +19% since August so there is a strong potential for a January decline. Traders may begin anticipating that decline over the next two weeks and either establishing short positions or simply taking profits and moving to the sidelines.

I don't want to load up the portfolio in advance of year-end. I am going to keep it skinny and plan on adding some positions on any January dip. We should never be in a rush to add positions just because the market is open and we want to trade. The name of the game is trading for a profit not trading just to trade.

The VIX hit an eight-month low on Friday and that means options premiums are at an eight month low. Selling premium today means we are taking on more risk than normal.

Jim Brown

Current Portfolio

Current Position Changes


New Recommendations

MICC - Millicom Intl Cellular $92.48

Millicom jumped on the 14th after Moody's upgraded their rating to Ba1 and outlook stable. Millicom is a global mobile telecommunications operator with operations in the world's emerging markets.

The sharp spike to $94 on Tuesday inflated option premiums and so far MICC is not giving back the gains. The strike prices are odd because of a recent dividend.

Enter this position only if the S&P and MICC are positive

Sell Short MICC Jan $85.40 Put (MICC11M8540) currently $1.05, stop 90.75

Chart of MICC

WYNN - Wynn Resorts $104.96

Yes, we are playing Wynn again. This stock has some of the best premiums of any on my list so it keeps coming back into my top ten almost every week.

WYNN won an upgrade from JP Morgan on Wednesday to an overweight with a price target of $118. The analyst said Macau growth was getting stronger and room rental rates in Vegas were also improving.

That was enough for a $6 bounce in the stock price and a good increase in premiums.

Enter this position only if the S&P and WYNN are positive

Sell Short WYNN Jan $97 Put (WYNN11M9700) currently $1.76, stop $102.85

Chart of WYNN

X - U.S. Steel $58.94

U.S. Steel is surging because of the demand for steel is growing, especially in the emerging markets. The major miners have raised their prices for steel to china by a significant amount for Q1 and will probably do the same for Q2.

U.S. Steel has suddenly found itself in a strong rally and breaking out to new highs.

Enter this position only if the S&P and X are positive

Sell short X Jan $55 Put (X11M5500) currently $1.24, stop $56.90.

Chart of US Steel

New Long Term Recommendations

None - Waiting for a "real" market dip

New Aggressive Recommendations


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)