The market decline due to the protests in Egypt was not quite what we were expecting to generate a market dip. Regardless of the reason we will gladly accept the buying opportunity.
I believe the Egypt problem will be fleeting. There were significantly fewer protestors out today and the looting binge appears to be over. The initial excitement of protesting an oppressive government and getting away with it has morphed into a realization that as many as 100 were killed and several thousand were injured. Having a street party get wildly out of hand does have its consequences.
The Egyptian military now appears to be in control and the crowds have thinned significantly. Mubarak is still in power as of Sunday evening in the USA but many analysts believe his fate has already been sealed and the powers behind the scenes are trying to make the transition orderly.
For the markets there is a real worry about a future flare up if Mubarak does not step down. Traders would probably be willing to buy the dip on Monday if they knew for sure Mubarak was on his way out but there are still quite a few loose ends.
The markets would have declined on Friday without the violence in Egypt but probably only for a day or so thanks to Amazon, Microsoft, SanDisk and the normal post peak earnings decline. The Egypt even only served to accelerate the decline.
The S&P came to rest right at the 1275-1280 support range and it could easily rebound from here. If we see a continued decline I would look for 1260 to be decent support.
If we do see a rebound on Monday it could be strong since so many people shorted the market on Friday. Of course there is always the risk that more people who were not watching the market on Friday or just not mentally ready to accept the losses, will watch the market open down on Monday and decide to pull the sell trigger.
Uncertainty is the enemy of the bulls. They can deal with almost any event as long as they know what is happening. Nobody really knows what it happing tonight because the news out of Egypt is limited. Much of the video from events of the last three days is being rerun with new voice overs so many TV viewers don't understand these are old pictures being run to sensationalize the news.
If we get a positive open on Monday I would buy the market or in our case, sell puts. If we see a negative open I would wait for a rebound into positive territory.
Stop losses are critical in this environment.
Current Position Changes
MOS - Mosaic Co $79.80 (Short Put)
Mosaic found support last week at $74 and appears to be moving up again. Potash posted strong earnings and that is good for the entire sector. Mosaic earnings are not until March 30th.
I think we can take a position just under that support at $74 and be relatively safe.
Enter trade only if S&P and MOS are both positive.
Sell Short MOS March $72.50 Put, currently $1.89, Stop $76.50
Chart of Mosaic
FLS - Flowserve $122.96 (Short Put)
Flowserve narrowed guidance slightly last week but still expects great earnings. A Credit Suisse analyst said Flowserve would benefit greatly from the large number of major engineering projects under construction around the world. 2011 is expected to be a good year for Flowserve. The positive comments pushed the stock $6 higher and it held those gains and closed positive again on Friday. Earnings are Feb 23rd.
Enter trade only if S&P and FLS are both positive.
Sell Short FLS March $115 Put, currently $2.50, stop $119.75
Chart of Flowserve
FTI - FMC Technologies $91.84 (Short Put)
Hardly a day goes by that FMC does not announce some new multi million dollar contract. Just last week FTI won an $85 million subsea contract from China's CNOOC Liuhua development. FTI has signed two other deals with Statoil and one with Total in the past three weeks. Earnings are Feb 14th.
Enter trade only if S&P and FTI are both positive.
Sell Short FTI March $85 Put, currently $2.10, stop $88.95
Chart of FTI
New Long Term Recommendations
None - Waiting for a "real" market dip, not a one day wonder
Current Aggressive Recommendations
FFIV - F5 Networks (Put Spread)
I am looking for a snap back bounce in F5 but it may take a couple days to appear. Investors are afraid of buying the dip before the dip is over. I am going to recommend shorting an April put and buying a short term February put. This way we get the most bang for the buck on the long put side.
I am putting a sell stop trigger on the play so we only enter the trade if the stock is moving up.
Enter trade ONLY if S&P is positive and FFIV trades at $115.
Option prices will decline before entry if FFIV is moving higher.
Sell Short FFIV Apr $130 Put (FFIV11P13000) currently $22.80, no stop, no target
Buy Long FFIV Feb $110 Put (FFIV11N11000) currently $5.30, no stop, no target
Chart of FFIV
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)