The market finally retraced some gains but not enough to change the trend.
The markets finally lost traction after a high profile touch of Dow 14,000 last Friday. That could have been a climax spike but the selling today did not appear to confirm it. This was more than likely just a long deserved bout of profit taking.
It was not enough of a sell off to inflate the put premiums with the VIX only moving to slightly over 14. Tomorrow will be the key to see if we are going to drift lower or will traders buy the dip.
We are in that time of the month in an earnings cycle where nearly every medium to low priced stock is announcing earnings. The big high dollar blue chips have already reported and their volatility has shrunk to nothing. Selling 75 cent puts on a $75 stock does not get me excited. The risk is too high for very little reward.
The smaller stocks in the $30-$60 range are reporting. There are more than 300 of them reporting this week. Since we don't want to sell a short put a couple days before an earnings report that takes a lot of them out of play.
The stocks I wanted to play today were all disqualified for one reason or another so I spent a couple hours looking at several hundred charts and news headlines. I only found one stock I was willing to add.
With the market down triple digits I am not excited about adding too much risk until we know if it will rebound. Selling puts in front of a market decline is not normally a solid investment strategy.
There is never a sure thing in the market. We try to find the best choices and then deal with the potholes as they appear. I plan on keeping a small list of recommendations over the next several weeks until a decent dip appears that will reduce our risk.
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Current Position Changes
FLS - Flowserve (Short Put - Closed)
Earnings on FLS are not for several weeks but we had a very nice profit and the option has declined to a minimal value. There was nothing left to gain by holding it open. Shares of FLS were starting to roll over and are resting on support at $152. I recommended we close the April short put position.
Closed FLS April $125 Put, entry $4.72, exit 0.50, +4.22 gain.
DDD - 3D Systems (Short Put - Closed)
3D was crushed by an article on Seeking Alpha saying the 3D printing sector was in a bubble and shares were overvalued. 3D fell -$9.57 last Monday and did not hit our stop but came close. This selloff could continue if the market weakens so I recommended we close this position for a breakeven.
Shares of DDD gapped down at the open on Tuesday and put us into a loss position.
Closed DDD Feb $55 Put, entry $1.85, exit $2.20, -.35 loss
VIX - Volatility Index (Short Put - Add Target)
The VIX put play was written to capitalize on the potential for a market decline on the debt ceiling debate in February. Congress has now kicked that can into May and we need to exit this position. Because the VIX has declined to five year lows we need to target a bounce to exit.
I am putting an exit target at 18 on the VIX. The VIX spiked to nearly 15 today and I suspect there is another dip in our future in February that will retest the 20 level. The market is entirely too bullish and eventually we are going to see a multiday decline.
VIX Short Mar $20 Put, entry $3.60, currently $4.80, add exit target @ VIX $18.00
New Short Put Recommendations
DECK - Deckers Outdoor (Short Put)
Deckers chart is wedging up to a breakout over the 200-day average at $43.69. After a long period of declines the company is finally regaining some respect. Jefferies upgraded their price target from $50 to $60 and reiterated a buy rating on the stock. They said their conviction on DECK has never been higher. Jefferies said the colder temperatures in January probably provided a buying catalyst for the UGG brand of boots. They expect inventories to stabilize.
There was a lot of option interest in DECK on Monday with 1,100 new call contracts at the $42.50 level. More than 7,700 calls across all strikes were sold before 1:PM.
Earnings are Feb 21st so we need to monitor the position ahead of that event.
Sell short March $37.50 Puts, currently $2.20, stop loss $38.95
New Covered Call Recommendations
New Long Term Recommendations
New Aggressive Recommendations
Existing Play Recommendations
Links to original play recommendation
RIG - Transocean (Covered Call)
FLS - FlowServe (Short Put)
WLT - Walter Energy (Covered Call)
NFLX - NetFlix (Short Put)
KORS - Michael Kors (Short Put)
VIX - Volatility Index (Short Put)
DDD - 3D Systems (Short Put)
CAB - Cabellas (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.