Option premiums are the lowest I can remember and that covers a lot of history.
I don't recall ever seeing option premiums, both calls and puts, as low as they are today. The sideways movement of the market over the last three weeks and the extremely low VIX has sucked all the air out of option premiums.
Even high dollar stocks with strikes in the money are ridiculously cheap. For instance the March $85 put on Occidental Petroleum (OXY), is only 97 cents and it is already 29 cents in the money. The $75 put on Apache (APA) after an $8 drop over the last two days is just over $1.00. When the stock is in freefall with an $8 drop and the premiums don't inflate you know there is a serious lack of volatility.
The lack of premiums is making it very hard to find plays. The majority of the charts I looked at this weekend are rolling over and suggesting the long awaited correction is just ahead. However, the futures are up on Monday night suggesting the dip buyers are alive and well.
I am only going to add one play today but with two different strategies. If you have to play something this week I would compare it to picking up nickels in front of a steamroller. You need to be very nimble. April options have not yet been priced so they were not available for new plays.
Here are some plays I considered but did not add. They will give you a starting point if you don't want to take the IOC plays below.
WFM $88.12 May $85.50 $2.98
CRR $90.07 June $80.00 $2.90
FSLR $34.10 March $32.00 $1.76
SNDK $51.71 April $49.00 $1.67
SINA $56.01 March $52.50 $1.70
I plan on keeping a small list of recommendations over the next several weeks until a decent dip appears that will reduce our risk.
Send Jim an email
Current Position Changes
KORS - Michael Kors (Expired put)
We had a February $50 short put on KORS last week and they reported earnings on Tuesday. I was going to recommend closing it after the earnings but the $8 spike made that unnecessary. I elected instead to simply let it expire.
Expired KORS Feb $50 Put, entry $2.07, expired, +2.07 gain.
WLT - Walter Energy (Covered Call)
The covered call on Walter Energy expired 42 cents in the money and should be called away at the open on Tuesday.
With Walter stalling at the $40 level you could continue to sell calls on this stock. Eventually there will be a breakout and you would be called away but this is a perfect resistance pattern. Sell $40 calls at $39 and then wait.
WLT stock, entry $36.32, called $37.50, +1.18 gain
Short Feb $37.50 call, entry $1.72, called, +1.72 gain
Short Jan $40.00 call, entry $1.97, expired, +1.97 gain
Total for position = +4.87 gain
SODA - Soda Stream (Short Put)
SODA is bouncing around over the $49 level and we have a March $45 put. The test of $49 twice last week encouraged me to add a stop loss to this play.
SODA Short March $45 Put, entry $1.70, currently $1.72, add stop $48.50
New Short Put Recommendations
IOC - Interoil Corp (Short Put)
Interoil is an old favorite. The option premiums are always huge and Cark Icahn is a big investor. IOC actually has a positive chart this time with a breakout in progress over the $62.50 level.
I wrote about this company last week with an anticipated entry after earnings on Thursday. The earnings did not appear and now they are scheduled for March 18-25th.
However, a new wrinkle has emerged. Interoil has no proven reserves and no production. All they have are some exploration rights offshore Papua New Guinea (PNG). The principal shareholders (10) own 70% of the stock. The principal shareholders have some political ties with the government of PNG. The government will get 22.5% of any production.
Reportedly IOC has "discovered" massive gas reserves in three wells in the Elk/Antelope Gas field. The exploratory wells were drilled for IOC by someone else. IOC claims the wells were tested by Schlumberger and Weatherford and they have 8.9 Tcf of recoverable reserves.
Because IOC is a very small company the government of PNG has requested that IOC obtain a major partner to develop this gas and be a part owner in the associated LNG project. We are talking billions in investment and IOC has no money. There is a huge divergence of opinion over the validity of the reserve claims.
IOC hired Morgan Stanley, UBS and Macquarie to lead the bid process for a partner. When the stock was declining in early February the company made an unusual announcement saying the bidding process would close on February 28th and the winner announced the following week. The stock went vertical and has gained about $17 over the last two weeks.
If there are bidders and a deal is announced the stock is going to explode. Potential price targets are in the high triple digits. If no deal is announced the stock is going to crater.
Given the credibility of Schlumberger and Weatherford I doubt there are no reserves. There may be reserves but it is IOC that has no credibility.
However, Carl Icahn has a large position in this company. You would think he would have done some due diligence before putting down a pile of money.
The unknowns surrounding IOC have juiced the option premiums to new highs. With all these events likely to drag out until after the March expiration I think we have a window of opportunity to use the March strikes for a play. I would hesitate to use a strike longer than March because of the volatility surrounding the various announcements.
Sell March $65 Put, currently $3.85, stop loss $67.75
New Covered Call Recommendations
IOC - Interoil (Covered Call)
See the IOC description under Short Puts.
The premiums for calls are out of sight. With the hype currently surrounding IOC we could have a very short covered call that goes into the money the first day. The high premiums will insulate us against the event risk to some extent.
Sell IOC March $70 Call, currently $8.10, stop $67.50
New Long Term Recommendations
New Aggressive Recommendations
Existing Play Recommendations
Links to original play recommendation
RIG - Transocean (Covered Call)
WLT - Walter Energy (Covered Call)
NFLX - NetFlix (Short Put)
KORS - Michael Kors (Short Put)
VIX - Volatility Index (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.