The market continues to inch higher with all the major indexes posting gains while the majority of market analysts predict a sell off.
It has been a long time since I have heard so many people predicting a blow off top and a correction. You would have thought the breakout over major resistance would have encouraged investors and analysts and we would be looking for tests of even higher resistance rather than worrying about how far the market will fall over the next week or two.
There is only one major index that has not broken out and that is the small cap Russell 2000. When that index finally breaks through resistance at 832 we may see some acceleration in the big caps. The Russell 2000 is seen as the fund manager sentiment indicator and right now it is lagging.
It does appear the long awaited flight from fixed income to equities is in full swing. The yield on the ten year note has jumped nearly half a point since the lows last week. This suggests investors are no longer willing to sit in fixed income while equities are breaking out to new highs.
Ten Year Yield Chart
We have some housekeeping to take care of for this expiration cycle and I have added a new play.
Send Jim an email
Current Position Changes
GMCR - Green Mountain Coffee (Close)
GMCR has not shown any signs of a sustainable rebound. I am recommending we close this play while there is still a minor profit and not wait for it to turn against us.
Close short GMCR Apr $45 Put, Entry $1.66, currently $1.30, gain +.36
Chart of GMCR
RIG - Transocean Offshore (close spread)
Transocean finally broke through resistance at $54 but it was too late to really produce the profits I was expecting. The options expire on Friday. We will escape with about a $2 gain even though the play failed to really take off. The partial settlement of the BP trial threw a wrench into the works and put off the trial date on the rest of the trial for 45 days.
The Long March $47.50 insurance put will expire worthless. Don't close it.
The Short March $57.50 put is currently $1.56 and we entered at $7.50. Close it at the open on Friday.
Chart of RIG
MMR - McMoran Exploration (close position)
This was a play on expectations MMR would announce the initial production results of the Davy Jones 1 ultradeep well in the shallow water gulf. They are about three months past their initial completion date due to various problems in the completion process. They continue to say they expect to complete before the end of March. However, the complete lack of any meaningful news is troubling. Our $13 insurance put expires on Friday and that would leave us uncovered on the short side of the position.
I am recommending we close this position for a minor loss rather than risk remaining uncovered on the short put. They could easily announce another delay and the stock could decline 20%.
Close MMR Short April $15 Put, entry $1.92, currently $3.05, loss -1.13
Close MMR Long March $13 Put, entry 0.33, currently 0.27, loss -0.12
Chart of MMR
MDR - McDermott (Covered Call Expire)
The March $14 covered call on McDermott should expire worthless with MDR at $13.58 at today's close. Let the call expire and we will write another call for April on Monday.
Short March $14 Call @ 82-cents, should expire for 82-cent gain.
USO - US Oil Fund (Covered Call Expire)
The March $41 covered call should expire worthless with the USO at $40.28 at today's close. We will write a new April call on Monday.
Short March $41 Call @ 86-cents, should expire for 86-cent gain.
WNR - Western Refining (Covered Call Called)
The March $18 covered call should be exercised and the position will be called away for a +$1.22 gain.
Short March $18 call @ 0.95, WNR @ $17.73 +.27, = $1.22 gain.
Chart of WNR
New Short Put Recommendations
RIG - Transocean Offshore (Put Spread)
Transocean has broken over resistance at $54 and could easily test resistance at 60 in the coming week. Motivation for this move is related more to the fleet status update today that was very bullish as well as the expectations for a settlement with BP.
Excerpts from the fleet status report:
Deepwater Expedition was awarded a two-year contract with an undisclosed customer commencing December 2012 at an initial dayrate of $650,000 ($475 million contract backlog). Additionally, the contract includes three priced eight-month option periods. Discoverer Seven Seas was awarded a three-well contract (approximately 180 days) for work offshore Indonesia at a dayrate of $445,000 ($80 million contract backlog). The rig's prior dayrate was $295,000. GSF Arctic III was awarded a three-month contract extension in the U.K. sector of the North Sea at a dayrate of $315,000 ($28 million contract backlog). The rig's prior dayrate was $280,000. Planned 2012 out of service time increased by a net 284 days, including 140 days associated with preparing the Deepwater Expedition, Discoverer Seven Seas, and Trident XIV for new or anticipated contracts. As previously disclosed, the Deepwater Millennium and the GSF Grand Banks shipyards were completed and the rigs are currently operating. In addition, since the previous fleet update summary, the GSF Rig 140 has left the shipyard and is en route to India.
Lease prices are going up everywhere and analysts believe there will be a 10% to 12% rig shortage by 2013. New build rigs totaling more than 100 coming into the market over the next two years are all leased on long term contracts and drillers are reactivating rigs that were stacked during the moratorium. The outlook is very positive.
Buy long April $55 put, currently $1.92, no stop
Sell short May $62.50, currently $7.25, no stop.
Chart of RIG
New Covered Call Recommendations
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)
SD - SandRidge Energy (Long Term CC)
YHOO - Yahoo (Long Term Combo)
PHM - Pulte Homes (LT Leveraged Combo)
JEF - Jefferies (LT Leveraged Combo)
GLD - Gold ETF (Short Put)
WFC - Wells Fargo (Combination)
CRR - Carbo Ceramics (Short Put)
JJC - Copper ETF (Short Put)
WNR - Western Refining (Covered Call)
EXXI - Energy XXI (LT Covered Call)
RIG - Transocean Offshore (Short Put Spread)
USO - US Oil Fund (Covered Call)
UGA - US Gasoline ETF (Short Put)
MMR - McMoran Exploration (Short Put)
BNO - US Brent ETF (Short Put)
ATHN - AthenaHealth (LT Short Put)
GMCR - Green Mountain (Short Put)
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.