There are more than 175 S&P companies reporting earnings this week or roughly 34% of the S&P. This is the heaviest week of the earnings cycle. With the FOMC meeting and Bernanke press conference the week is sure to have some serious volatility.
The Dow closed over 12,500 on Thursday and a new two-year high. No other indexes broke out to new highs but all were positive ahead of the three-day weekend. Futures are positive on Sunday night, as are oil, silver and gold. This is due to another decline in the dollar with the dollar index trading under 74 on Sunday night.
The week ahead is shaping up to be potentially bullish as long as the earnings parade is a duplicate of the bullish performances from last week and Bernanke does not trip over his tongue in the Wednesday press conference. As I said in my weekend Option Investor commentary Bernanke and the Fed have spent a lot of money creating this rally and I believe he will do everything possible to not screw it up during the conference. That means he will be as big a cheerleader as possible for the economy.
I am going to try and start a few positions for Monday in hopes of capitalizing on a positive week.
No Open Positions
Current Position Changes
BTU - Peabody Energy $66.02 (Short Put)
Peabody reported earnings last week that beat estimates despite a drop in production in Australia due to the floods. Peabody said the price of coal from that region rose +43% in Q1 because of the shortages and that increase offset the production loss. Peabody believes we are seeing a global coal supercycle where demand is growing faster than supply. More than 700 gigawatts of new coal fired electrical generation plants are either planned or under construction. That represents new demand for 2.5 billion tons of coal.
I believe investors will buy Peabody for this future demand now that they know the financial damage from the flood was minimal.
Do not enter this position unless BTU and the S&P are both positive.
Sell short BTU May $67.50 Put, currently $2.93, stop loss $64.50
Chart of BTU
SLV - Silver ETF $45.53 (Short Put)
Silver refuses to die and is up another $1.75 on Sunday night at $47.80. The iShares silver trust is currently $45.56 and should open significantly higher on Monday. Catching a ride on the silver rocket could be dangerous but I think the near term target is $50 on the actual metal. Just reaching this target does not mean it is immediately going to roll over and die. As long as the dollar it dropping and inflation rising the price of silver will be strong. I expect it will trade between $45 and $50 over the next couple weeks. Hopefully long enough to let out put premiums deflate.
Do not enter this position unless SLV and the S&P are both positive.
Sell short SLV June $42 Put, currently $1.50, stop loss $43.25
Chart of SLV
WLT - Walter Energy $136.38 (Short Put)
Walter reported earnings last week that more than doubled from 77-cents to $1.53 per share and said the price it had received for its coking coal was the third highest ever. With coal demand surging and Walter's recent acquisition of Western Coal on April 1st. the company is poised to earn even more in the years ahead. Walter rallied +$5 after the earnings and I expect the coal rally to continue.
Do not enter this position unless WLT and the S&P are both positive.
Sell Short WLT May $130 Put, currently 3.20, stop $131.50
Chart of Walter
New Long Term Recommendations
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)