The September expiration cycle was very strong with $41.80 per share in gains last week alone.
We closed 11 positions last week for some very nice gains. Some of the gains were multi-month like GMCR where we wrote calls on it for three months before finally being called away for a $16 total gain on a $75 stock.
I rarely tout our gains but sometimes I think we need the positive reinforcement of actually putting a number on the page to see how successful the process can be. We did have four losses since the August expiration cycle of -$8.11 but even with those losses we booked gains of $44.99 per share for the month.
Never underestimate the power of a bull market. We were helped by a solid two week rally from the August 30 lows. The last three weeks of August were pretty ugly with the Dow losing -875 points. Selling option premiums is a bullish strategy for a bull market and we should never forget that.
With the S&P futures down -3 points as I write this on Monday night and the headlines from Washington monopolizing all the TV news the odds of an up market this week are pretty slim.
There is no need to force plays just to have something to do. We have had a good run the last several months so be patient and limit your positions.
Send Jim an email
Long Term Positions - None
Current Position Changes
JCP - JC Penny (closed)
It was a good thing we bailed on the JCP position. We had a September $13 put with the stock at $13.64 last Monday but with the news coming daily I did not want to wait for it to expire on Friday. We closed the position at the open on Tuesday with JCP at $13.60. Shares declined to close under $13 on Friday and we would have been put the stock. Instead we made 56 cents. I would say that was a successful exit.
Closed JCP Sept $13 Put, entry .62, exit .06, +.56 gain
TSLA - Tesla Motors (close)
We have an October $140 put on Tesla with the stock at $181. In theory we could let it run and squeeze another 60-80 cents out of the position. However, we are already up +$6 and there is always risk when a position is open. While not probable it is possible for the market to correct and TSLA shares to crash back to $140. Close the position and pocket the profits.
Close TSLA Oct $140 Put, entry $6.99, currently .89, +6.10 gain.
WLT - Walter Energy (closed)
Walter broke through resistance at $15 last week and was looking strong. Unfortunately it went from hero to zero with a collapse back below that prior resistance. Several brokers came out against the coal sector last week and nipped the rally in the bud. This was an aggressive position with the put strike at the money on the assumption the rally would continue. It did not continue and we closed the position last Tuesday.
Closed WLT Oct $16 Put, entry $1.46, exit $2.70, -1.24 loss.
HLF - Herbalife (Stopped)
Herbalife declined over $4 in the last two days and dipped to $67.19 intraday today and stopped us out at $67.25. The reason for the decline was a comment by Carl Icahn that the market was overvalued. Traders immediately began dumping stocks that Icahn owns just in case he decides to eliminate some positions. He is up about $30 in Herbalife so that would be a good one to dump except that he hates Ackman and Ackman is dying in this short.
Closed HLF Oct $65 put, entry $2.19, exit $3.50, -1.31
GMCR - Green Mountain Coffee (Called)
We had sold the same $77.50 covered call on GMCR shares three times. Each time the stock ran up and then pulled back. Last week our luck ran out and the stock was called away when it closed at $84.21. If we had two more days we could have made it four in a row after the stock crashed nearly $5 on Monday to trade under $78 again. There are reports that K-cup sales growth slowed from 24.7% to 20.2% in the current quarter. This came from Dougherty & Company on a downgrade from buy to neutral.
Regardless of the reason we are out of a very successful position.
Called GMCR shares, entry $76.88, exit $77.50, +.72
June $77.50 call, entry $3.65, expired, +3.65 gain
Aug $77.50 call, entry $5.65, expired, +5.65 gain
Sept $77.50 call, entry $6.05, called, +6.05 gain
Recap .72 + 3.65 + 5.65 + 6.05 = $16.07 gain
TSLA - Tesla Motors (Called)
We had a Sept $150 covered call on TSLA and needless to say it was called away. Back when we wrote this call it was basically at the money with TSLA at $148. If we do a new TSLA call we will pick a strike a little farther out.
TSLA shares, entry $148.65, called $150, +1.35 gain
Sept $150 Call, entry $8.95, called, +8.95 gain.
Recap $1.35 + $8.95 = $10.30 gain.
QIHU - Qihoo (Closed)
Qihoo got some bad news last Monday when a competitor sold a stake in their search business to another competitor. Qihoo had been rumored as the winner in the stake sales but Tencent Holdings got the win. This may be only a temporary setback for QIHU but it has declined -$12 in the last three days. We were profitable in this position so I elected to close it rather than wait until the smoke clears and the eventual winner is determined. Shares were volatile over the last week but support at $84 did not break. We were probably safe but you can't go wrong taking a profit.
Closed QIHU Oct $75 Put, entry $4.81, exit $2.24, +2.57 gain.
JASO - JA Solar (Expired)
We had a Sept $10 covered call on JASO and the stock closed at $9 on Friday and our call expired. Shares of JASO dipped on Monday and I am going to wait for a rebound to $9.25 before selling another call.
Sept $10 call, entry $1.20, expired, +1.20 gain.
LGF - Lions Gate Films (Called)
We had a Sept $32 covered call on LGF and the stock closed at $33.83 on Friday and was called away. This was the second call written on LGF. Considering LGF declined -$4 over the last five days I was starting to worry.
LGF shares, entry $29.44, called $32, +2.56 gain
July $31 call, entry .76, closed early .50, +.26 gain
Sept $32 call, entry .98, called, +.98 gain.
Recap: +2.56 +.50 +.98 = +4.04 gain.
CSIQ - Canadian Solar (Called)
We had a Sept $14 covered call on CSIQ and the stock closed on Friday at $15.07 to end our position in CSIQ. This was the second call we wrote on this position.
CSIQ shares, entry 14.20, called $14.00, -0.20 loss
Aug $14 call, entry $1.40, closed .25, +1.15 gain
Sept $14 call, entry $1.02, called, +1.02 gain
Recap: -0.20 +1.15 +1.02 = +1.97 gain.
IPI - Intrepid Potash (Called)
We had a Sept $14 covered call position on IPI and the stock closed at $18.01 on Friday calling us away.
IPI shares, entry $13.59, called $14.00, +.41
Sept $14 call, entry $1.13, called, +1.13 gain
Recap: +.41 +1.13 = $1.54 gain.
New Short Put Recommendations
QIHU - Qihoo 360 Technology
We bailed out of a short put on QIHU last Tuesday after there was a negative headline about an acquisition in the Chinese Internet space. After reading several articles today I believe that was premature. We captured a $2.50 profit so I hope nobody is going to complain.
QIHU was primarily an anti virus company and they have about 90% of the Chinese market. Because of their market penetration they are also the most rapidly growing search engine in China. The deal between Sohu and Tencent may help Sohu in the years ahead but it will not have an immediate impact. In fact, QIHU has reduced the number of readers it was sending to the Sohu video site in retaliation for the deal done without Qihoo. Sohu gets about 10% of its web traffic from Qihoo. That means Qihoo is actually in the driver's seat. They have 90% penetration in China for anti-virus and while Sohu only has 5% market share for search. The future definitely belongs to Qihoo.
Stats from the prior play description:
Revenues grew 108% year over year.
Net income from its popular Qihoo 360 operation grew 372%.
The reach of its mobile security product grew by 182%.
Average clicks per day on its Personalized Start-up Page including subpages reached 590 million compared to 368 million one year ago.
Its PC based products achieved penetration of 96%.
Net margin increased to 21.8% compared to 9.6% in the same quarter in 2012.
Sell Nov $80 Put, currently $3.70, stop loss $81.75
New Covered Call Recommendations
New Aggressive Recommendations
GMCR - Green Mountain (Covered Call)
Green Mountain dropped nearly $5 on Monday after a downgrade from buy to hold at Dougherty & Company.
Dougherty claimed that K-cup sales growth slowed from 24.7% to 20.2% in the current quarter. There is no confirmation of this estimate. Longbow Research said the sell off was unwarranted and said rumors it was not gaining share in the market were unsubstantiated. Imperial Capital raised the price target to $100 just a week ago and kept an outperform rating on the stock. The firm said it left the GMCR investor day even more positive on the sustainability of double digit earnings growth.
There are two ways to play this using covered calls. We can either buy the shares on the dip, currently $79.50 and write the November $85 calls for $4.25 for a $9.75 profit if called OR we could sell the October $72.50 calls, currently $8.45 and hope the stock continues to drop over the next two weeks as the market digests the Washington headlines. We could then buyback the October calls at a vastly decreased premium and then write a November call when the market rebounds in mid October.
Hypothetically a buy at 79.50, sell call at $8.45.
Dip to next level support at $72.50 in two weeks
Buy call back at $3 with 2 weeks till expiration.
Wait for rebound on passage of budget bills
Stock rebounds to $79.50, sell Nov $85 call for $4.00
In theory a $15 gain. THEORY ONLY. No guarantees.
The simpler strategy would be to just buy-write the Nov $85 calls. If the stock drops, buy them back and then resell on a rebound. That is the strategy I am recommending.
Buy-write GMCR Nov $85 Covered Call, currently $79.50, $4.25, no stop.
New Long Term Recommendations
Existing Play Recommendations
Links to original play recommendation
PHM - Pulte Homes (Covered Call)
PHM - Pulte Homes (CC Update)
BZH - Beazer Homes (Covered Call)
JASO - JA Solar (Covered Call)
LGF - Lions Gate Films (Covered Call)
LGF - Lions Gate (CC Update)
BBRY - BlackBerry (Covered Call)
CSIQ - Canadian Solar (Covered Call)
JASO - JA Solar (Covered Call)
QIHU - Qihoo (Short Put)
GMCR - Green Mountain Coffee (Covered Call)
TSLA - Tesla Motors (Covered Call)
JCP - JC Penny (Short Put)
WLT - Walter Energy (Short Put)
CZR - Caesar Ent (Covered Call)
RAX - Rackspace Hosting (Covered Call)
HLF - Herbalife (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.