This rally can't get any respect with most analysts calling for a correction any day now.

Unfortunately they have been wrong for two months. The indexes just keep shaking off the bad news regardless of the source and moving slowly higher. The odds are good the Dow will set a new high on Tuesday. Just setting a new high is only one part of the equation. It has to hold that high and then move higher for it to count.

The slowly rising market has pushed the VIX back to 14 and put premiums have evaporated again. For two days last week they actually inflated but there was a resounding hiss on Wednesday when the air escaped in a rush.

I looked at more than 1,000 stocks on Monday and there were extremely few candidates worth putting money at risk. I did add two of them.

I also listed a few extra short puts and covered calls if you are just chomping at the bit to put money in the market with the Dow at a new high. These are not official plays but a starting point for you if you want to put additional money to work.

I would caution everyone that hitting a new high sometimes results in a sell off. The target is reached and the excitement evaporates. However, in this environment the market is being driven by the Fed and I am not sure there is anything that can seriously degrade the gains.

I would still love to see a 5% correction but we may have to wait another week or two for that to happen. The political calendar is full of risk later in the month. The payroll numbers this week could also be a bump in the road but the Fed steamroller could simply flatten that bump and keep traffic moving higher.

Jim Brown

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Current Portfolio

Current positions

Current positions

Current Position Changes

DECK - Deckers Outdoors (Short Put - Closed)

After breaking above $43 for several days Deckers had broken below that support and was in danger of falling to a new four week low in the weak market. I recommended we close the position. Support held at $40 and the stock rebounded but hindsight is always 20:20.

Closed DECK March $37.50 Put, entry $2.55, exit $2.20, +0.35 gain.

DECK Chart

NFLX - NetFlix (Short Put - Closed)

We had a short NFLX April $130 put. With NFLX at $180 you would think we are far enough out of the money to be safe. However, April is a long way off and a sustained market decline could inflate the premiums. We were up +$5.32 on the position with only $1.18 left in the put. There was nothing to be gained by continuing to hold this risk. I recommended we close the position.

Closed NFLX April $130 Put, entry $6.50, exit $1.32, +5.18 gain.

NFLX Chart

CAB - Cabelas (Short Put - Closed)

Cabelas reported record earnings and raised guidance but the stock had lost its momentum. I recommended we close this position at the current breakeven before the market deals us a loss. The bad news, Cabelas turned around from the decline to $49 and rallied back to $52 the following week. The good news is we did not lose any money in what appeared to be a weak position.

Closed CAB June $50 Put, entry $4.50, exit $4.50, no gain

CAB Chart

IOC - Interoil Corp (Short Put, Covered Call)

It was not a fun week for IOC. The stock plunged at the open on Thursday to stop us out of both positions at $67.75. IOC announced a shelf offering for $1 billion and the stock collapsed. Unfortunately we lost money on both positions.

Short Mar $65 Put, entry $3.80, exit $5.00, -1.20 loss.

Covered Call
IOC Stock, entry $73.00, exit $67.75, -5.25 loss
Short Mar $70 Call, entry $8.90, exit $5.77, +3.13 gain
Net loss -$2.12

IOC Chart

New Short Put Recommendations

HLF - Herbalife (Short Put)

There is a dogfight in progress between the junkyard dog and the society pedigree over the Herbalife bone. Bill Ackman shorted 20 million shares of HLF saying the company was going to zero. That is basically 20% of the outstanding shares of 103 million.

Carl Icahn smelled blood in the water and came swooping in to cause Ackman some pain in retaliation for a $7 million suit Ackman won against Icahn in years past. Icahn has acquired a 13.6% position and has permission from the company to acquire up to 25% and put two directors on the board.

I believe Ackman is overexposed with his 20 million share short. Icahn is a clever and very experienced manipulator and I think he will eventually cause the mother of all short squeezes he predicted. It is only a matter of time and he has plenty of money to engineer it.

I am recommending a May $36 short put, currently $3.00. The $36 level is strong support and the stock is trending higher on the Icahn news.

An aggressive trader could buy the stock and write covered calls on it. The $45 calls are $3. That would be a $7 gain if HLF moved over $45 by expiration.

Sell short May HLF $36 Put, currently $3.00, stop $35.00

Chart of HLF

Additional potential plays

These are not official recommendations but they were close enough to list and let you decide if you want to add some more positions.

Stock, Price, Strike, Premium
NUS $42.56, Jun $35, $1.40
GMCR $47.92, Apr $44, $1.72
HD $70.30, Apr $72.50, $3.25 aggressive
PCYC $91.43, Apr $85.00, $3.10

New Covered Call Recommendations

Potential Play Candidates

With the market creeping higher the put premiums are very skinny. If you would like to write some covered calls I would use this list for candidates.

Stock, Price, Strike, Premium, Profit
CLDX $10.43, April $11, $.50, +$1.07 if called
BBY $17.78, April $18, $.85, +$1.07 if called
KBH $19.13, April $20, $.85, +$1.72 if called
LEN $39.86, April $40, $1.90, +$2.04 if called
DHI $23.24, April $24, $.76, +$1.52 if called
INCY $22.72, April $22.50, $1.35, +$1.13 if called
QLIK $26.45, April $27, $1.35, +$1.90 if called.

New Long Term Recommendations


New Aggressive Recommendations

TSLA - Tesla Motors (Short Put)

Tesla was hit with three headlines in recent weeks that knocked about 12% off the stock price. They missed earnings by a few cents because they air freighted a lot of parts when they were ramping up initial production of the Model S sedan. They also paid a lot of overtime in that ramp up process in order to meet initial production targets. Secondly they had a bogus road test article in the New York Times that garnered some bad publicity before the Times printed a retraction. Last, they had to postpone filing their 10K for a week because of a reclassification of some expenses in 2011 and 2012. The accounting change will not impact any material earnings metric and the total for 2012 will be $31 million or less.

These events knock the stock for a loss in a week that the Dow was experiencing higher volatility. I believe the bad news is now priced in and the stock will move up from here. Founder Elon Musk has promised they will post their first profitable quarter in Q1.

This put is in the money and we are betting on a rebound by TSLA.

Sell short April $37 Put, currently $3.20, Stop loss $33.75

Tesla Chart

Existing Play Recommendations

Links to original play recommendation

RIG - Transocean (Covered Call)

WLT - Walter Energy (Covered Call)

NFLX - NetFlix (Short Put)

CAB - Cabellas (Short Put)

DECK - Deckers Outdoors (Short Put)

IOC - Interoil (Short Put)

IOC - Interoil (Covered Call)

Margin Requirements:

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.