Now that volatility is back in style we have it on steroids.

It was a rough week for option expiration and this one has not started off any better. At the lows of the morning the Dow was down -248 and at the highs of the afternoon only -25 but the sell programs returned at the close to end down -139.

Critical support was broken on the S&P that suggests we will see 1540 tested. That compares to the 1687 intraday high in late May. On the bright side the put premiums are definitely inflating. On the downside stocks are crashing so selling puts on them today is not a valid strategy.

The volatility last week knocked several of our covered calls that were in the money back out of the money and the calls expired. We will get to sell calls on those again but we need to wait for a couple positive market days to reinflate call premiums.

The main challenge for the market is the new liquidity crisis in China. The government is trying to shutdown the shadow banking sector and overnight loans from bank to bank are now outrageously expensive. The SHIBOR rate spiked to more than 13% last week and that is for an overnight loan. Bank Everbright defaulted on an overnight loan because they could not roll it over the following day. Liquidity has dried up. This should be temporary and once all the banks understand the government is not going to come to their rescue they will cut back on lending to Wealth Management Plans and private investment partnerships. Previously they could borrow long from the interbank process and loan to a shadow entity and make a spread of 1.5% or more. Today that spread has been cut to 0.4% and worsening. All of these loans are going to dry up and the liquidity boom the government is trying to fix will fade.

The problem is the speed at which this problem occurred and the rate at which it could self destruct. Firms accustomed to borrowing on a routine basis are going to be shut out of the market and that could have significant long term ramifications. Businesses will fail and China's economy will sink even further.

The U.S. markets should be nearing an oversold stage where a bounce is probable. However, the last week of June is not known for rallies. The Russell index rebalance on Friday will keep a negative bias on the market for the rest of the week.

S&P futures are down -5 points as I type this. I think we should wait until next week to launch any new plays rather than stepping in front of this speeding train.

Jim Brown

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Current Portfolio

Current positions

Current Position Changes

GMCR - Green Mountain Coffee (closed)

We had a June $77.50 covered call on GMCR that had been in the money prior to the market decline. The market weakness knocked GMCR back to $73.33 and the call expired worthless for a $3.65 gain.

Because of the weak market I am not replacing the call today. We need to see a couple positive days to reinflate call premiums before we sell again. That should happen next week. There is decent support at $70 and shares only lost $1 today so the relative strength is good.

Expired Covered June $77.50 call, entry $3.65, +$3.65 gain.

GMCR Chart

SCTY - Solar City (Called)

Solar City closed on Friday at $34.50 and we had a June $25 call. That position was called away for a decent gain. The position was entered on a gap open so the stock price was slightly above the call price.

SCTY stock, entry $25.76, called @ $25.00, -0.76 loss
Short June $25 Call, entry $2.45, +2.45 gain
Net gain +1.69

SCTY Chart

PPC - Pilgrim's Pride (Closed)

We had a June $12.50 short put on PPC that had deteriorated to 15 cents and would have expired on Friday BUT the stock had suddenly begun to decline. I recommended we close the position rather than wait for it to expire. Something is weighing on the stock and after the big spike the prior week I am not surprised.

Closed PPC June $12.50 put, entry $1.30, exit .10, +$1.20 gain.

PPC Chart

CCJ - Cameco (Called)

The June $20 call on Cameco expired in the money and the stock would have been called away for a net gain.

CCJ stock, entry $19.94, called $20, +0.06 gain
June $20 covered call, entry .70, +.70 gain.
Net gain +0.76

CCJ Chart

HLF - Herbalife (Called)

We had a June $44 call on Herbalife and it closed over $45 on Friday and the stock would have been called away. With negative news out on HLF today that was fine with me.

HLF shares, entry $43.21, called $44.00, +.79 gain.
June $44 covered call, entry $2.20, called +2.20 gain.
Net gain +2.99

HLF Chart

BZH - Beazer Homes (Expired)

We had a June $21 call on Beazer and the stock closed at $17.83 on Friday after homebuilders were crushed after the Fed meeting when interest rates shot higher. It was the worst selloff in the bond market in more than ten years. Selling in the two year treasuries was the worst in 50 years.

I am not recommending a new call at this time. There is a flood of housing data this week and we should see a bounce in the homebuilders.

BZH June $21 call, entry $1.05, expired for $1.05 gain.

BZH Chart

TFM - Fresh Markets (Stopped)

Fresh Markets collapsed on Thursday to trigger our stop loss at $49.75. Because the market was in free fall the put premiums were rocketing higher. We lost $1.70 on the position.

TFM Sept $50 Put, entry $2.20, exit $3.90, -$1.70 loss.

TFM Chart

New Short Put Recommendations


New Covered Call Recommendations


New Aggressive Recommendations


New Long Term Recommendations


Existing Play Recommendations

Links to original play recommendation

SCTY - Solar City (Covered Call)

HLF - Herbalife (Covered Call)

CCJ - Cameco (Covered Call)

PHM - Pulte Homes (Covered Call)

BZH - Beazer Homes (Covered Call)

GMCR - Green Mountain Coffee (Covered Call)

PPC - Pilgrim's Pride (Short Put)

SLW - Silver Wheaton (Covered Call)

BSFT - Broadsoft (Covered Call)

JASO - JA Solar (Covered Call)

HLF - Herbalife (Short Put)

DDD - 3D Systems (Short Put)

LGF - Lions Gate Films (Covered Call)

BBRY - BlackBerry (Covered Call)

TSLA - Tesla Motors (Short Put)

CTRX - Catamaran Corp (Short Put)

Z - Zillow (Short Put)

CRR - Carbo Ceramics (Short Put)

TFM - Fresh Markets (Short Put)

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.