I am expecting some volatility in January but hopefully it is to the upside.

Unfortunately hope is not a strategy. Ten of the last 15 Januarys have seen significant declines in the first three weeks of the month. The first week is about a 50:50 split between posting gains or losses but after the first week the odds rise significantly in the favor of the bears.

I don't want to load up on a lot of plays ahead of that volatility. If I am wrong about it we just won't make any money. If I am right about it we won't lose any money. Given those two options I will choose not losing every time.

None of our European problems have miraculously disappeared over the holiday week and the U.S. economic calendar is full of major reports. This could be a rocky start to 2012.

I am writing from the road in Albuquerque this weekend so this update will be short.

Jim Brown

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Current Portfolio

Current positions

Current positions

Current Position Changes

FIO - Fusion IO (stopped)

Fusion declined starting on Wednesday morning and stopped us out on Friday afternoon at $23.75 with the option trading for $1.30. That equates to a loss of 40-cents on the position. There was no news and it appeared to be sector weakness.

Position: Short Jan $22.50 put @ 0.90, exit $1.30, -0.40 loss.

New Short Put Recommendations


New Covered Call Recommendations

LEAP - Leap Wireless (Covered Call)

Leap Wireless was talked up as the consolation price for AT&T last week in its failed acquisition of T-Mobile. AT&T needs additional spectrum and JP Morgan thinks LEAP or PCS would be one way for AT&T to acquire this spectrum without a lot of regulatory problems. The analyst thought LEAP would be valued around $13 in an acquisition deal by AT&T. Shares of LEAP spiked to $10 on the news before declining into the close to $9.29.

This may never come to pass but the analysis should have put a floor under LEAP stock. I suggest we sell a Jan $9 covered call, currently $1.05 but probably less at the open on Tuesday. On a $9.29 stock that represents a decent premium and should LEAP decline below $9 we can do it again in February.

Buy-Write LEAP Jan $9 covered call, currently $9.29/$1.05, Stop $7.50

Chart of LEAP

PANL - Universal Display (Covered Call)

Universal is the leader in Phosphorescent OLED IP and chemicals used in making various kinds of lights and displays. Their technology allows for 30% thinner displays than LCD technology. This company is the leading edge of the revolution in display technology. Samsung just signed a seven year license agreement and agreed to buy this technology solely from PANL.

The stock was hammered a couple weeks ago by a negative article on Streetsweeper.com. Several analysts have rebutted the article in recent days and the stock has begun to rebound after finding strong support at $34.

Call premiums are very high. I suggest we sell a Jan $35 call, currently $3.60 with only 18 days remaining on the contract.

Buy-Write PANL Jan $35 Call, currently $3.60, stop $32.75

PANL Chart

Long Term Recommendations


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)

YHOO - Yahoo (Long Term Combo)

PHM - Pulte Homes (LT Leveraged Combo)

JEF - Jefferies (LT Leveraged Combo)

HITK - Hi-Tech Pharma (Covered Call)

FAST - Fastenal (Short Put)

FIO - Fusion IO (Short Put)

SD - Sandridge (Covered Call)

MMR - McMoran (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.