It was another good week and the sharp decline to the Oct 4th lows have almost been forgotten.

Unfortunately the gains were not without volatility. WYNN declined over $10 from Wednesday to Friday but ended the week with gains. Still a $10 drop will cause you to do a double take.

On the long term plays Bank America was off to a good start for the week with a rally to a two week high but the downgrades to 14 banks by Fitch on Thursday knocked it back for no gain. This is a long term position.

Beazer is doing good with a breakout to a four week high on lower mortgage rates and improving traffic in the new home sector. Pulte is also tagging along for the ride.

MDR closed right at resistance ahead of the earnings cycle for energy stocks and should breakout over the next couple weeks.

Bank of New York is holding its own despite all the turmoil in the banking sector. Earnings could provide a strong push that we hope is higher and not lower. BK is being painted with the sector brush and hopefully their earnings will be better than most.

Nvidia is breaking out to new three month highs on strength in the chip sector plus some new products making waves. This is also a long term play.

Yahoo is the recipient of more acquisition rumors than web searches. So far none have turned into firm offers. I am confident somebody is going to pop the question but it may turn into a group love in. With Alibaba interested and Yahoo owning 40% of them that makes them a player in almost any deal. Yahoo Japan is another challenge because none of the local players want to take on that division. This will require another player, probably their partner Softbank, taking a position and spinning the division off. Reportedly there are some serious tax considerations that have to be overcome first. Then Yahoo has to overcome the founder problem. Jerry Yang has said he wants to run the resulting company and he still has a lot of stock. Any buyers will have to deal with all these issues and then come up with $20+ billion in funding to make it happen. Microsoft has been rumored to be willing to provide funding in order to keep their 10-year search engine deal from imploding. This could be messy in the long run but I have confidence somebody will make them an offer they can't refuse.

Sears Holding is on fire and stock is well over our entry price. Unfortunately DLTR, SHLD and WYNN were all entered on a monster gap open so the option prices were less than we hoped at entry. All are profitable and time is clicking off the clock.

I am recommending we close the short put on SLV. The metals are not moving higher and some upset in Europe could cause a steep decline at any time. The option is worthless at 3-cents but you can never tell what tomorrow will bring. Exit the play at the open on Monday.

After Monday's big gain I thought we would get a pullback so we could enter some new positions. Tuesday was relatively flat after a small bounce at the open and it looked all day like it might roll over into the close. When it didn't I thought Wednesday would be the day. Wednesday gapped open as well tanks to news out of Europe. When Thursday's decline came it only took us back to Tuesday's levels and then rebounded at the close. I never felt comfortable adding new positions. I know looking back at the +500 point Dow gain I wish I had added some more but after being burned at Monday's opening gap I just never felt confident.

I hate to add plays just to add plays. Timing the market may not be an exact science but that does not mean we should just blindly put money at risk. Unfortunately sometimes we just have to bite the bullet and take our chances.

Now that we are in earnings season we have to be doubly careful that any new play is not going to report earnings OR that nobody in their immediate sector is going to report. That makes play selection even more difficult.

To get around this short term volatility I am going to recommend a couple more long term plays where we can sell farther out of the money for higher premiums and I am going to use ETFs where one bad earnings event can't kill us.

Jim Brown

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Current Portfolio

Current positions

Current Position Changes

SLV - Silver ETF (Close Trade)

The short Oct $26 put is currently trading at 3-cents with a week to go. I suggest we close this position rather than leave the risk on the table. The SLV is currently $31.31 so we are well out of the money but you can never go wrong taking a profit.

Buy to close SLV Oct $26 Put, currently 3-cents.

New Short Put Recommendations


New Covered Call Recommendations


New Long Term Recommendations

XOP - Oil Exploration SPDR (Short Put)

The Exploration SPDR is an ETF that holds energy companies that primarily explore for oil and gas. This is the big growth area for the energy sector while things like refiners and pipelines have low margins and are subject to price swings in the case of the refiners.

The XOP is currently $50.88 and should open higher on Monday thanks to the El Paso buyout announced on Sunday. El Paso is not an explorer but any acquisition in the energy sector will increase anticipation for the next big deal. I would not be surprised to see several more acquisitions before year end.

Crude oil normally rises in price in Q4 and energy earnings for Q3 should be strong because oil prices averaged +25% higher in Q3 than Q3-2010.

Because I expect it to open higher on Monday I am picking a higher strike at $43. I wanted to pick $42 but the open interest was too low. If we get a significant move higher at the open you might want to move up even higher but the recommended strike is $43.

Do not enter this position unless the XOP opens positive on Monday.

Sell short XOP January $43 Put, currently $2.39, stop loss $44.75

Chart of XOP

IYM - Russell 2000 ETF (Short Put)

The Russell 2000 has lagged the blue chip indexes in terms of relative positioning even though it has rebounded by a larger percentage. This is because the Russell was more heavily shorted than the blue chip indexes. I believe the markets will continue to trend higher until month end although the trend could flatten as we get closer to the end of October.

Once past October and assuming Europe does not self destruct again the fund managers should shift into small caps for the year end and Q1 moves. Small caps are normally the best performers in the last two months of the year. We are going to protect ourselves with stops just in case disaster strikes.

Do not enter this position unless the IWM is positive at the open on Monday.

Sell short Jan $61 Put, currently $2.13, stop loss $64.75

Chart of IWM

New Aggressive Recommendations


Existing Play Recommendations

Links to original play recommendation

BAC - Bank of America (Long Term)

BAC - Bank of America (Update 8/31)

BZH - Beazer Homes (Long Term)

MDR - McDermott International (Long Term)

BK - Bank of New York Mellon (Long Term)

NVDA - Nvidia (Long Term)

SD - Sandridge Energy (CC + Long Term Combo)

YHOO - Yahoo (Long Term Combo)

HPQ - Hewlett Packard (Aggressive Short Put)

PHM - Pulte Homes (LT Leveraged Combo)

SLV - Silver ETF (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.