For traders trying to find a nice quiet option trade with no volatility it was not a good week. Early week declines turned into late week short squeezes with the Dow rebounding +831 points from the Tuesday lows.

I do not know how to avoid a week like we just saw. The Tuesday low was a six-week low and today's high close was a six-week high. The ranges on the indexes were huge and nearly every play was stopped out due to short covering.

Semoconductors, biotechs, energy stocks, casinos, etc, all rebounded strongly from the Tuesday lows. Short covering was extreme and there are actually some buy programs being unleashed on the market.

Going into last week, we were primarily negative with mostly bear call spreads. Every play was stopped out on the market rebound.

The first week of October is known for market lows but it appears those lows were made at the end of September. Huge sell programs hit the tape early last week and buy programs have been creating a surge of short covering the last couple days to start October off with a bang.

I do not know which way to play for October since the historical pattern seems to be early. If that is the case, we should be looking for bullish plays in hopes the resistance at 1,990 on the S&P is broken. With the Dow closing at a six-week high today it should cause some more buying as fund managers chase prices and performance with only a few weeks left in the fund year.

I added some relatively safe short puts today in hopes the upward market trend continues.

Jim Brown

Send Jim an email

Current Portfolio

The fourth column in the portfolio graphic is the earnings date. We will always exit a position before that date unless specifically mentioned otherwise in the play description. For the plays where we will not exit I added the No-X designation in the portfolio.

Current positions

Covered Calls

Current Position Changes

UAL - United Continental (Closed)

The spike in the airlines from the prior week faded with the rebound in oil to $46.50 and the deterioration in the overall market. The transport index dropped to a four-week low on worries about global traffic and shipping. We were stopped out on the UAL put spread for a small gain. I recommended we close the long put while it has value.

Closed Oct $45 Long put, entry .26, exit .19, -.07 loss.
Previously closed Oct $50 Short put, entry .75, exit .42, +.33 gain.
Net gain +26 cents

QIHU - Qihoo Technology (Closed)

I recommended we close the long call last Tuesday when QIHU shares weakened. After as couple days the stimulus talk in China created a 15% spike but we were already out of the position. Hindsight is 20:20.

Closed Oct $55.00 long call, entry .19, exit .10, -.09 loss
Previously closed Oct $47.50 short call, entry 2.10, exit 2.30, -.20 loss
Net loss 29 cents.

EOG - EOG Resources (Stopped)

The spike in oil prices and short covering in energy shares caused EOG to rebound to prior resistance. We were stopped out of the position when EOG traded at $74.35 on Oct 1st.

Closed Oct $82.50 short call, entry .41, exit .41, zero gain.
Retain Oct $87.50 long call, entry .57, currently .19
Previously closed Oct $82.50 short call, entry $1.50, exit $1.30, +.29 gain.

OXY - Occidental Petroleum (Stopped)

The spike in oil prices and short covering in energy shares caused OXY to rebound +10% in four days. We were stopped out of the position when OXY traded at $66.35 on Oct 1st.

Closed Oct $70 short call, entry .58, exit .50, +.08 gain
Retain Oct $75 long call, entry .27, currently .12
Previously closed Oct $70 short call, entry $1.22, exit $1.65, -.43 loss.

TIF - Tiffany (Stopped)

Tiffany spiked $5 in two days to stop us out today at $79.05. There was no news. This was purely short covering.

Closed Oct $82.50 short call, entry .54, exit .30, +.24 gain
Retain Oct $90 long call, entry .42, currently zero.
Previously closed Oct $85 short call, entry $1.27, exit $.87, +.40 gain.

QCOM - Qualcomm (Stopped)

The semiconductor sector rebounded on strong short covering after Micron earnings last Thursday night. Qualcomm rebounded from $52 to $56.50 to stop us out at $54.15. There was no news specific to QCOM. This was sector short covering.

Closed Oct $56 short call, entry .55, exit .31, +.24 gain.
Retain Oct $62.50 call, entry .14, currently zero
Previously closed Oct $57.50 call, entry .64, exit .74, -.10 loss.

LVS - Las Vegas Sands (Stopped/close)

The casino sector was in serious trouble after 16 consecutive months of declines in Macau gaming revenue. On Friday the Chinese government said they were going to "take action" to revive Macau later this year. No details were given but casino stocks exploded higher. LVS rallied +20% in two days.

I am recommending we close the long call because I doubt LVS will rebound much farther on last week's news. The short covering should be about over.

Closed Oct $47 short call, entry .44, exit .30, +.14 gain.
Close Oct $50 long call, entry .12, currently .10, -.02 loss
Net gain 12 cents.

New Recommendations

BHP - BHP Billiton (Naked Put)

BHP has been crushed in the commodity decline but the recovery of Glencore and Freeport has put a bid under the miners. Carl Icahn announced a big position in Freeport and that calmed all the commodity investors. BHP hit a multiyear low at $30.15 on the 28th. I am recommending we sell the November $30 put.

Sell short Nov $30 put, currently .70, stop loss $31.65

(You could turn this into a put spread by purchasing the $27.50 put for 35 cents.)

LEN - Lennar Corp (Naked Put)

Lennar is one of the fastest growing builders in the USA. They grew earnings 42% last year and are on track for a good 2015 as well with something in the range of +18.6%. Shares rebounded from support at $46 and closed over $50 today.

Earnings 1/14/16

Sell short Nov $45 put, currently .62, stop loss $47.15

RH - Restoration Hardware (Naked Put)

This company defied the late September market decline but then dropped $8 in two days on the 25/28th. However, shares never closed below the support at $90. The August flash crash low was $86 but there was an immediate bounce with a close above $91. There appears to be plenty of investor interest on the dips. I am recommending an $85 put, which is well below the current $95 price and well below strong support.

Earnings 12/10.

Sell short Nov $85 put, currently 1.00, stop loss $89.65

New Covered Call Recommendations


New Aggressive Recommendations


New Long Term Recommendations


Existing Play Recommendations

Links to original play recommendation

BHI - Baker Hughes (Covered Call)

EOG - EOG Resources (Bear call Spread)

TIF - Tiffany (Bear call Spread)

UAL - United Continental (Put Spread)

OXY - Occidental Petroleum (Bear call Spread)

QIHU - Qihoo Technology (Bear call Spread)

QCOM - Qualcomm (Bear call Spread)

LVS - Las Vegas Sands (Bear call Spread)

ARWR - Arrowhead Research (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.