Thanks to the FOMC statement and Bernanke's smooth and frank press conference the major indexes have all moved to new highs. For the Nasdaq that is a 10-year high. I have already gotten two newsletters tonight claiming this is a top for the market and time to go short. When will the bears ever learn?

There are two main rules everyone needs to remember. 1) Don't fight the Fed. 2) Don't forget rule number one.

Obviously I can't say when the markets will top but I would be very surprised to see it this week. With the indexes breaking out to new highs this is a bullish confirmation of the rally that topped in February and then went through two months of consolidation before the move over the last week. Read that again. Two months of consolidation while the bears preached doom and gloom. That gloom has been pierced by a ray of sunshine and the markets are moving higher.

The positive part of the Fed show today can be summed up in two parts. The first one involves the extended period language. Bernanke was asked what that really meant. How long is the extended period. Bernanke said nothing would change for at least two meetings after any announcement with the extended period language. That is positive because now investors don't have to fear every meeting. It also means we are probably looking at September of even December before anything changes.

The second positive point for the markets was the continuation of QE-1.5. That is the reinvestment of the payoff proceeds from any prior security they purchased. Basically if they bought a 2-year security two years ago they are going to take that money when the note matures today and reinvest it in treasuries and that reinvestment process will not stop when QE2 ends in June. This will probably continue until Q4 and then it will take a couple meetings for them to announce it will end and then have time pass before it actually ends.

The bottom like to these two points is the Fed is not likely to change interest rates until 2012. This is what most analysts believed but there was always the worry the Fed was looking at the problem differently. Through the question and answer conference today the analysts and the Fed are now on the same page of the book and there are several chapters to go.

Now if we just keep those two rules in focus we should do ok. That does not mean there won't be dips and after the gain over the last week we are certainly due for a short-term dip. However, it means dip buying should be alive and well for months to come unless news suddenly appears that the economy is spiraling down the drain again. That could happen because of oil prices so there is still a threat.

The portfolio took a hit this morning when several major energy stocks missed estimates and the entire energy sector imploded at the opening bell. Most energy stocks recovered and many ended the day positive but the two that were relative to us both hit their stops.

Peabody Energy and Walter Energy both were stopped for some pretty big losses at least for us. Rarely do we lose a dollar on a single position and both were stopped for more than a buck today.

Since the net impact of the Fed news was a seriously weaker dollar I am going to add a play on gold tonight to replace the coal loss.

Jim Brown



Current Portfolio


Current positions


Current Position Changes


BTU - Peabody Energy (Stopped)

Peabody dipped to $63.22 this morning and hit our stop at $63.50 before rebounding to close near $65. Long term I still believe Peabody will do great but we were burned on that energy sector drop today. The option was trading at $4.50 at the stop for a -$1.40 loss.


WLT - Walter Energy (Stopped)

Walter dropped -$5 at the open before rebounding to end the day down -12 cents. This is highly frustrating but a fact of life in trading. The option was trading at $4.45 when stopped for a -$1.10 loss.


New Recommendations


GLD - SPDR Gold Shares $149.19 (Short Put)

The dollar index hit a three year low after the FOMC news and it is continuing to drop overnight. The dollar index is currently 72.97 after breaking support at 74 just two days ago. This is a major move in the dollar and gold is trading at $1529 overnight. Unless the dollar suddenly found massive buying interest this trend should continue.

Do not enter this position unless GLD and the S&P are both positive.

Sell short GLD June $145.00 Put, currently $1.84, stop loss $145.75

Chart of GLD


New Long Term Recommendations


None


New Aggressive Recommendations


None


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.