I understand having one stock plunge for a news event but two in the same day each for a $6 drop is the equivalent of lightning striking twice.

When Medco Health (MHS) closed on Thursday at $64.50 and $4 over our stop loss we thought we were safe from disaster. Unfortunately mister market had other thoughts. It was announced before the open on Friday that Blue Cross Blue Shield had awarded a $3 billion contract for prescription services to Caremark (CVS) instead of the current holder, Medco. The stock imploded at the open to a low of $56.38 and -$8 from the prior close.

Our stop was $60.50 but it would not have made any difference if it had been a quarter below the prior day's close. The -$8 gap lower was in place before the options opened for trading. The option opened at $2 to give us a $1.40 loss on the position. It was one of those situations where lightning struck and there was no warning.

Also on Friday Weight Watchers (WTW) dropped -$6.51 on absolutely no news. Volume was three times normal. This put the stock very close to our $77.95 stop but fortunately did not stop us and has not put us in the loss column. It was however very scary on the same day as the MHS decline.

I am not going to add any new puts this week because of the weakness in the market. The Dow and S&P have been down for four consecutive weeks. Instead I am going to add some covered calls. Ordinarily I don't like covered calls because of the additional expense of putting on the trade but in our current market I feel it is justified.

In theory covered calls should only be written on stocks bought specifically for the purpose and you want to be called away every month. That works in theory but with volatility so low today there are very few stocks with call premiums worth selling. We will have to go a little further out on the calendar and take on a little more risk.

Jim Brown

Current Portfolio

Current positions

Current Position Changes


New Recommendations

MCP - MolyCorp $62.68 (Covered Call)

MolyCorp is a rare earth miner. The stock experiences bouts of volatility that keep its option premiums pretty high. Over the last month MCP has declined from near $80 to $56 on one of its quarterly swoons and a big share lockup expiration. It appears to have found support at $58 and has begun moving higher. I am a believer in the rare earth story and the squeeze put on exports out of China. Year to day they have cut exports by -62% and they were down -53% in April alone. Rare earth prices have been rising $13,000 a ton every month to just over $122,000 today. Rare earths are used in everything from electric car batteries to iPhones, iPads, radar, missiles, satellites, solar power, etc. China produces 97% of the world's rare earths so a 62% cut in exports is significant. This should keep support under MolyCorp.

Do not enter this position unless MCP and the S&P are both positive.

Buy MCP stock, currently $62.68, sell June $65 call, currently $2.20, stop $57.95

Profit if called $5.52.

Chart of MolyCorp

NVDA - Nvidia $19.50 (Covered Call)

Nvidia is a graphics chipmaker that has begun branching out into other forms of chips. They tripped up with earnings back on May 13th and the stock was pounded to a low of $17.12. For the last two weeks Nvidia has been in rally mode and has nearly recovered all its losses. The added volatility will give us a little higher premiums.

Do not enter this position unless NVDA and the S&P are both positive.

Buy NVDA, currently $19.50, sell July $20 call, currently $0.93, stop $18.35

Profit if called $1.43

Nvidia Chart

ALJ - Alon USA Energy $11.91 (Covered Call)

Alon USA operates five small refineries in the USA and processes about 253,000 barrels per day of crude. The refiner was knocked for a loss in early May when it appeared the Louisiana refinery could be flooded. Now that the danger has passed the stock has begun moving higher again. With WTI oil hovering around $100 this should provide great profits for those refiners able to use oil priced to WTI. Coastal refiners are forced to use oil indexed to Brent, which is $14 higher. That means coastal gasoline is significantly higher priced and allows non coastal refiners to achieve a higher crack spread.

Do not enter this position unless ALJ and the S&P are both positive.

Buy ALJ, currently $11.90, sell July $12.50 call, currently $0.70, stop $11.25

Profit if called $1.29

Chart of ALJ

New Long Term Recommendations

None until a positive market trend returns

New Aggressive Recommendations

None until a positive market trend returns

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.