It is not a Santa Claus rally powering the market but expectations for a fiscal cliff miracle that caused buying today.
Everyone knows the details on the current fiscal cliff battle so I won't restate them here. The market took the news of another White House meeting with Boehner as signs of progress in the talks towards a resolution.
The market is counting down the days until year end and investors know something has to be done ASAP in order to get a bill signed by December 31st. As long as there are talks underway the market may continue to price in a resolution. If those talks break down and Obama gets on the plane for his Hawaiian vacation then all bets are off. The market would probably react very negatively and that is the risk we have today.
Fortunately both parties to the talks understand the gravity of the situation and a stalemate on the entire cliff is not likely to happen. We could see pieces of the cliff resolved but the larger issues kicked into 2013. The market will pass judgment on whatever headlines come out of Washington.
Fortunately the volatility over the last couple of days has inflated premiums so there are some decent plays available. Let's hope that volatility does not end up biting us in the back if the talks break down. Unfortunately I could not find any low dollar plays. The market melt-up has erased the premium for January options and most don't have February strikes available.
The Option Writer newsletter will be on Wednesday next week due to the holidays.
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Current Position Changes
DECK - Deckers Outdoor (Short Put - Closed)
The Deckers play was going great until suddenly the bottom fell out. I raised the stop loss last week to $37.40 and that stop was hit on Friday. Fortunately our put had depreciated significantly and we still exited with a profit.
Closed: Short Jan $30 Put, entry $1.30, exit .58, +0.72 gain
CAB - Cabellas (Short Put - Closed)
Cabellas also lost momentum and had settled at support around $46.50. Last week I raised the stop loss to $45.70 and that stop was hit on Tuesday. The mall shooting in Oregon started the big decline and the school shooting accelerated it.
Closed: CAB March $45 Put, entry $3.50, exit $3.10, +0.40 gain
PCYC - Pharmacylics (Short Put - Close)
PCYC has run away from us with a $10 spike above where we entered the position. The put has declined to only 10 cents and there is nothing to be gained by continuing to hold it. Close the position at the open on Tuesday.
Close: PCYC Jan $45 Put, entry $2.03, currently $.10, +1.93 gain
FLS - Flowserve (Short Put - Raise Stop)
Momentum on Flowserve has slowed and I am raising the stop to $135.75. We have seen several major declines in various stocks recently and I want to err on the side of caution.
FLS April $125 Put, entry $4.72, currently $3.05, raise stop to $135.75
RIG - Transocean (Covered Call - Close Call)
The Jan $52.50 call has declined to 8-cents and there is no reason to leave it open. We are nearing the end of the year and there is a good chance BP and the government are going to announce a settlement before the case comes to trial in February. Potential settlement numbers are making the rounds every week. If there is a settlement we could see Transocean rocket higher.
I want to close the call portion of this position and hold the stock until January and then add a new call position. Today there is nothing worth selling without giving up what could be substantial gains on a settlement announcement.
Transocean is holding right on support at $44.50 while we wait.
Close RIG Jan $52.50 Call, entry $1.07, currently $.08, +0.99 gain
ATHN - Athena Health (Short Put - Raise Stop)
ATHN rallied +$10 over the last two weeks and our short $60 put is almost worthless at 41 cents. Shares of ATHN are still rising so I am going to give it one more week before closing the play. That will get us past the December expirations and push the premiums lower. I am raising the stop loss to $69.75.
ATHN Jan $60.00 Put, entry $2.50, currently $.41, +2.09 gain
New Short Put Recommendations
New Covered Call Recommendations
New Long Term Recommendations
CRR - Carbo Ceramics (Short Put)
Carbo Ceramics is the leading producer of ceramic proppants to the energy sector. The proppants are used in fracturing wells. They are little ceramic balls the size of a grain of sand that are pumped into a well under high pressure. When the rocks crack the grains become lodged in the cracks and hold them open to allow the gas and oil to flow.
Carbo took a hit in August when they saw earnings decline from the shift in rigs from the gas patches to the oil patches. Oil fracturing requires less proppant. Carbo was not prepared for the major shift in rigs from one side of the country to the other. They have caught up in the delivery cycle and the stock is on the verge of a breakout.
The earnings in late October were positive and the stock spiked then investors took profits as is normal in the earnings cycle. Now Carbo is wedging up against resistance at $81 and I expect a breakout soon.
I am recommending the March $75 put, currently $4.50. A breakout over that resistance at $81 should quickly move higher.
Sell short CRR March $75 Put, currently $4.50, no initial stop.
NFLX - NetFlix Inc (Short Put)
Netflix has found new life. After announcing a new content deal with Disney the analyst community has suddenly endorsed the company as a growth stock once again.
I am not crazy enough to believe that a 2016 deal with Disney is powering the current rally but I am eager to profit from whatever is pushing the stock higher.
You know the company so I don't have to go into a lengthy explanation. I am recommending a $75 strike that is well below the current price. We will be using a stop loss on this volatile stock.
I picked a strike WELL under the price but nothing prevents you from moving up to an $80 put for about 50% more premium.
Sell short NFLX Feb $75 Put, currently $3.00, Stop loss $84.
New Aggressive Recommendations
Existing Play Recommendations
Links to original play recommendation
RIG - Transocean (Covered Call)
SBUX - Starbucks (Short Put Spread)
CAB - Cabela's (Short Put)
FLS - FlowServe (Short Put)
PCYC - Pharmacyclics (Short Put)
VMW - VMWare (Short Put)
ATHN - AthenaHealth (Short Put)
DECK - Deckers (Short Put)
WLT - Walter Energy (Covered Call)
ENR - Energizer (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.