Greek headlines spiked the market on Monday and tanked the market today. Until this problem is resolved, the equity markets are doomed to excessive volatility in opposite directions.
The Dow declined -178 points after the EU Finance Ministers and Greek politicians failed to agree on any of the terms of the proposed settlement. The Greek PM fired off a few hateful words and stormed out of the talks. The various EU finance ministers did likewise saying a resolution is very unlikely.
The market rolled over from the new highs on the Nasdaq and Russell 2000 and profits were taken. I have no reason to think this is any more than just an excuse to take profits on negative headlines but we need to be prepared in case it develops into something worse.
The markets have been highly volatile over the last six week but remained in a 60 point range on the S&P. There is always the possibility we could retest the bottom of that range at 2070 before moving forward.
We are bumping up against the Q2 earnings cycle and numerous companies report over the next three weeks before the July options expire. With the headline volatility and the uptick in earnings warnings, it is very difficult to find attractive plays. I do not want to repeat the performance of June (recap below) so I am going to try and err on the side of caution.
We are already off to a bad start with Zillow and Tesoro suddenly catching a bid for different reasons.
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Current Position Changes
Stop Loss Updates
Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.
TSO - Tesoro (Stopped)
The entire refining sector jumped after Cowen & Company said the narrowing of the spread between WTI and Brent could be positive for refiners and they expected them to maintain positive free cash flows through the summer. Cowen said Q2 earnings would come in above estimates for Valero and Tesoro. Tesoro rebounded on that news and crude prices rallied to close over $61.
I am going to recommend we close the long call because I doubt TSO will continue the rebound.
Stopped July $90 Short call, entry .74, exit $1.05, -.31 loss.
Close July $100 Long call, entry .36, currently .25, -.11 loss.
Net loss -.42.
Z - Zillow (Stopped)
Zillow spiked on news they had sold ActiveRain to the Ben Kinney Companies. ActiveRain was a realtor training website. This was another headline event that we could not have known about in advance. We were stopped out at $93.55.
I am recommending we maintain the long July $105 call just in case the rebound continues.
Closed July $95 short call, entry $1.03, exit $2.40, -1.37 loss.
Maintain long July $105 call.
June Option Recap
June was a rough month. The S&P was very volatile with moves from 2070 to 2135 and back again. Headlines on Greece and the Fed kept the market volatile and the only real direction was sideways. There was also a lot of headline volatility in the individual stocks. We were hit by some bad luck on WYNN and stopped out on the short call only to see the stock move to a new low. We were stopped twice on LNG and UAL.
I was definitely too aggressive for the market conditions. I realize that to be consistently profitable I need to find the stocks with the absolute lowest volatility and least chance of a headline move. This may not be the right market for any attempt at a high premium position. I will continue to evolve the play choices.
HP - Helmerich & Payne (Bear Call Spread)
HP is primarily a land driller although they do have a couple of offshore rigs. Onshore they have 332 rigs of which most were under contract 12 months ago. In the 10Q they filed on Monday they said on April 23rd only 165 rigs were contracted and they were stacking (taking out of service long term) the rest. Some of the rigs they were stacking were still under contract but producers were not drilling wells. They said based on early termination notices they had received since March 31st they could receive as much as $75 million in early termination penalties in Q2. Of course that is well less than the daily rent payments those rigs would have been earning had they stayed on lease. This could be a really rough quarter for HP. HP 10Q
Earnings July 30th.
Sell short July $75 call, currently .45, stop loss $73.45
Buy long July $80 call, currently .05, no stop.
Net credit 40 cents.
WYNN - Wynn Resorts (Bear Call Spread)
WYNN is contrary to the ultra low volatility strategy but the trend here should be our friend. With Macau revenue expected to fall -30%-40% in June the stock is in a serious decline. Since June 2014 revenue in Macau has declined every month and June is expected to be the worst month on record. June Worst Month Ever
Earnings July 29th.
Sell short July $105 call, currently .71, stop loss $102.45
Buy long July $110 call, currently .24, no stop.
Net credit 47 cents.
If that is too close to the money you could use the $107/$113 at .42/.13
Existing Play Recommendations
Links to original play recommendation
GMCR - Green Mountain Coffee (Bear Call Spread)
HLF - Herbalife (Bull Put Spread)
Z - Zillow (Bear Call Spread)
NSC - Norfolk Southern (Bear Call Spread)
APC - Anadarko Petroleum (Bear Call Spread)
TSO - Tesoro Corp (Bear Call Spread)
Prices Quoted in Newsletter
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