It is tough to sell options during an earnings cycle. The risks are huge and the rewards are minimal.
I discussed this last week. Hundreds of stocks announce earnings over the next couple weeks and a serious miss by any single company will not only kill that stock but the sector and possibly the market. The same works with shorting calls. An earnings surprise and suddenly you can be seriously underwater.
I only added one play this week because everything I had picked as a possible had earnings in the next couple of weeks.
We also have the market risk of a possible October surprise ahead of the election. Today's rally was a short squeeze after a week of declines. We were due for a squeeze but there is no guarantee it will continue.
I actually believe we will see the markets rise towards the end of October and maybe Friday's touch of support is all the dip we are going to get. Time will tell.
I added Mohawk Industries (MHK) as a short put last Monday night. I did not put the customary caution to not enter the play unless the S&P and MHK were both positive. That was an operator error on my part. However, MHK gapped -2 points lower on Tuesday and I certainly hope that everyone reading this newsletter understands that is NOT the preferred entry for a short put and they did not enter the play. MHK continued its decline through Friday and never qualified as a play. I will try to be better about adding that qualification in the future.
Send Jim an email
Current Position Changes
RIG - Transocean Offshore (Short Call - Close)
We have a covered call on RIG using the November $52.50 call. We sold it for $1.45 and it is now worth 24 cents. I am recommending we close that call and pocket the profits.
I want to sell a new call using the January $52.50 strike. The premium is only $1.00 but RIG will have to rally $6 for us to be called away. That would be a profit on the position. RIG has resistance at $50. If that resistance holds we will continue writing calls for as long as we can.
Close RIG short Nov $52.50 Call, entry $1.45, currently 0.24, +1.21 gain
Sell short RIG Jan $52.50 Call, currently $1.00, no stop.
INFY - Infosys (Short Put - Closed)
The INFY put was closed at the open on Tuesday and it was a good thing we exited. The opening print on Tuesday at $48.38 was the high for the week. INFY missed estimates on Friday and collapsed to $43.22. We did take a loss on the position but it was minimal.
Closed NOV $45 Put, entry $1.05, exit $1.65, -0.60 loss.
New Short Put Recommendations
SHLD - Sears Holding (Short Put)
Sears has been slowly rebounding off support at $55 for the last three weeks. Eddie Lambert is continuing to buy shares and that $55 level should remain support. That is the confluence of the 50, 100 and 200-day averages.
Retail sales were up strongly again in September by +1.1% after a +1.7% gain in August. Consumer sentiment hit a four year high. I am dumbfounded by that turn of events but we have to play what the market gives us.
Earnings are not until November 15th. I am recommending a November $55 Put, currently $1.90. However, if you would like a little more safety you could drop back to the $52.50 for $1.23.
Do NOT enter this position unless both the S&P and SHLD are positive
Sell short SHLD Nov $55 Put, currently $1.90, stop loss $56.25.
New Covered Call Recommendations
Long Term Recommendations
New Aggressive Recommendations
Existing Play Recommendations
Links to original play recommendation
EXXI - Energy XXI (LT Covered Call)
RIG - Transocean (Covered Call)
SBUX - Starbucks (Short Put Spread)
GG - GoldCorp (Short Put)
ADSK - Autodesk (Short Put)
BMRN - Biomarin (Short Put)
CLB - Core Labs (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.