We knew Tuesday was going to be ugly but the news related volatility was very overdone.
With the market closed on Monday the sentiment regarding the Libyan crisis turned negative and had a chance to fester before Tuesday's open. I had expected a decline to support at 1325 on the S&P but I did not expect the rebound to fail as badly as it did. This is a testament to the overly bullish market conditions from last week.
Markets always tend to over react to any news event, positive or negative. Today was an over reaction to the downside. However, I think everyone has been expecting a 2-3 day decline for many days now. They just did not expect it to begin with a -200 point Dow loss.
Unfortunately we were stopped out of FLS, APKT and CREE. One of our new plays from this morning was also stopped and that was FedEx. Rather than detail each one I put the option price at the stop in the Target column.
The Cree stop was painful because the stock gapped down about $2.50 on the opening print. This spiked the option premiums by an equal amount because the strike was in the money. That will put a dent in our February performance but we still have time to recover.
I made a mistake in adding First Solar this morning. In the frenzy around all the Libya news I forgot to check for earnings dates. An astute reader reminded me the earnings are after the close on Thursday. I recommend we close that position at the close on Thursday.
I am going to take advantage of this market dip and add a couple more plays tonight. Do NOT enter these trades unless the individual stock and the S&P are in positive territory on Wednesday.
Current Position Changes
FSLR - First Solar
First Solar has earnings after the close on Thursday. Please close this position before the close on Thursday. This stock is highly volatile and we could easily see a $10 spike or dip after the earnings report.
Close short March $150 Put on Thursday at the close.
WYNN - Wynn Resorts $123.08 (Short Put)
Wynn declined -4.63 on Tuesday for he first day of weakness since the 7th. Support should be around $120 and there is still $1.68 in premium for the March $115 put.
My wife is at a seminar in Vegas this week and she said everywhere she went the hotels were packed. This is the same sentiment we have been hearing from the hotel companies as well. Vegas is healing and Macau is paying the bills.
Enter this play only if the S&P and WYNN are both positive.
Sell short WYNN March $115 Put, currently $1.68, stop $118.35
Chart of WYNN
ESI - ITT Educational Services $73.87 (Short Put)
The for-profit educational companies are in rally mode because the new rule to tie funding for colleges to their students incomes and loan repayment rates was dealt a serious blow last week. The republican controlled House passed an amendment that would defund the rule and essentially kill its implementation. Analysts don't believe the House can get the amendment approved in the Senate and President Obama could still veto it.
However, the positive press should keep the stock moving for a couple weeks and that is all we need to make some money.
Do not enter this position unless the S&P and ESI are both positive.
Sell short ESI March $67.50 Put, currently $1.23, stop $68.95
Chart of ESI
New Long Term Recommendations
IWM - Russell Index ETF (Short Put)
The Russell declined on Tuesday by 21 points to decent support but even stronger support awaits at 800-808. That equates to 80-81 on the Russell ETF. I believe once the Libya headlines fade from view investors will come roaring back into the market. They have been waiting for a decent dip since the Egypt dip in late January. They got their wish on Tuesday.
While I believe we will eventually rebound from this pause we could still see several more days of weakness if the Libyan madman continues to shoot his own people. For that reason this is still a risky trade.
I am going to give two qualifications for this trade. If the market begins to rebound then we want to be short this put. That means we want the Russell to be positive. However, if we do get a continued dip I would enter the play with a trade at $80.50 on the ETF. The 80-80.50 range should be decent support.
Only enter this trade if the Russell is positive OR with a trade on the ETF at $80.50.
Sell short IWM April $84 put, currently $4.60, target $85.
I will add the stop loss once the position is active.
Chart of IWM
New Aggressive Recommendations
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.