While everyone is warning on the fiscal cliff there is still another pothole in our path.
The cliff is getting all the headlines this week but that will probably change on Tuesday. Europe is going to come back into focus with Greece the target. The Troika has spent the last month going over the Greek books and checking off all the promises they had made in order to get the prior bailouts. Pending the successful audit of all the lists the Troika was supposed to approve the next tranche of 31.5 billion euros to be given to Greece.
The euro zone finance ministers announced late Monday that the payment decision due out this week had been postponed until the next meeting on November 20th. The head of the euro group, Jean Claude Juncker, said there were a few more things to be checked "because not everything that was promised to be done had been done." Is anyone surprised about this? Greece has never completed ANY list of demands or promises since this entire scenario began three years ago when Greece admitted they were broke and they had falsified the books to sell debt.
The problem is that every time the Troika forces a new austerity program on Greece it lowers their GDP and then their debt to GDP goes up and violates the latest agreement on the ratio and they have to start over. The second problem is that Greece is cheating on the austerity measures. For instance if the Troika says they have to cut government workers pay by 10% then Greece cuts it by 10% but then pays them for 14 months for every 12 months they work. They get an extra months pay as a bonus to make up for the 10% cut.
Greece is going to end up leaving the euro zone eventually because there is no way they can ever repay the 240 billion euros in the bailout program. It is only a matter of time before they kick the Troika to the curb and go back to the drachma as their currency.
The news on Greece tonight sent the S&P futures down -8 points when it was announced.
The markets are teetering on the edge of a major correction. Critical support has been broken but the S&P is clinging to the 200 day average at 1381 with a second consecutive close at 1380. If that hold breaks and the S&P moves away from the 200 day then serious selling could appear.
The president and congress are set to take up the topic of the fiscal cliff and neither side has much to gain by being stubborn at this point. They need to get it handled even if it is just to kick the can further down the road and relieve the immediate pressure.
The capital gains tax and dividend tax provisions are critical. If those are not extended quickly then quite a few investors will be forced to sell stocks before year end in order to benefit from the current low tax rates.
I am hesitant to add any new plays with the market in a down trend. However, I am going to add two longer term plays that should benefit from the election results.
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Current Position Changes
SHLD - Sears Holding (Short Put - Close)
We are holding a short Nov $55 Put on SHLD. The put strike changed today as a result of the spinoff of Sears Canada. Our $55 strike turned into a $52.92 strike as a result of the spinoff. Sears has earnings on Thursday and even with expiration on Friday I see no reason to risk holding over that earnings report. SHLD has been known to be a highly volatile stock and I would rather take our profits now than wake up on Friday and find out we have a loss.
Close SHLD Short Nov $55 Put, entry $1.70, currently 0.39, +1.31
ADSK - Autodesk (Short Put - Close)
Autodesk has failed to maintain its upward trend and is slowly bleeding back to support at $30. We have a January $32 short put and we are slightly negative as a result of the market decline last week. I am recommending we close this position before ADSK declines any further.
Close JAN $32 Put, entry $2.35, currently $2.65, -0.30 loss.
New Short Put Recommendations
New Covered Call Recommendations
Long Term Recommendations
CAB - Cabela's (Short Put)
Cabela's Inc is a retailer of sporting goods specializing in hunting, shooting, fishing and outdoor sports. They missed earnings by a penny in their Q3 report and the stock was crushed for a $10 loss mainly because of their +20 gain in the prior three months. Management raised guidance to the upper end of the prior range and said 2013 earnings growth would be at least in the low double digits. Revenue rose +9% and earnings +28% so it was not like they had a bad quarter. You may remember that all the retailers had trouble in late summer as the economy was ticking down and consumer sentiment was declining on high gas prices.
The selling was overdone. The election outcome was a windfall for Cabela's. Gun sales are exploding on fears president Obama will try to add new regulations. When he was first elected gun sales soared and remained at a feverish pace for the last four years. Ruger firearms had to quit taking orders for three months in early 2012 because they could not keep up with the pace of orders.
Since the election the president has already mentioned new firearms regulations on more than one occasion and expressed support for the UN Gun Ban treaty. This is pouring gasoline on the fire for sportsman and gun owners. Some dealers are having to limit the number of magazines they can sell to each customer because of extremely high demand.
Analyst Lee Giordano of Imperial Capital noted on Oct 22nd that background checks rose +14.7% in the prior month and marked the 14th consecutive month of double digit growth. "Consumer demand remains at elevated levels driven by the uncertain political and legislative climate." This was BEFORE the election and sales have soared after Obama won.
I view the risk for Cabela's to be minimal but of course that is only my opinion. I am recommending the March $45 put, currently $3.40. As the gun story gains additional traction and retailers begin posting numbers for Q4 sales I think Cabela's will return to its prior highs over $50.
Sell short Mar $45 Put, currently $3.40, stop $42.50
RGR - Sturm Ruger (Short Put)
This is a play along the same thought process as the Cabela's play above. Ruger had to stop taking orders in early 2012 for three months because business was so strong. The Obama win and the surge in gun buying as a result suggests Q4 could be a blowout quarter for Ruger as well as Cabela's.
The stock is relatively cheap and the put premiums are high. I am picking the $45 strike, currently $6 OTM and right at support. RGR appears ready to break above resistance at $51 on the post election comments by the president. RGR has based in that $45 range for three months as Romney and Obama traded leads in the polls. Now that the election is over there is no reason for a decline. Q4 is normally a good sales period for firearms in normal times. This should be an outstanding quarter.
Sell Short April $45 Put, currently $3.10, stop $42.50
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)
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.