The European debt crisis I discussed on Sunday and the 6.4% inflation in China combined to knock our markets into the severely negative category at Monday's open.
The negative S&P prevented any of our positions from being activated and that is a win for us. That means we get to look at the entries from a lower perspective and one with a lot (but not all) of the risk removed.
The S&P halted its plunge right on decent support at 1320 and a level that could be seen as a buying opportunity. Unfortunately there was no buying at the close so it remains to be seen if traders will come back to the market. How many times do you have to get blindsided by the debt crisis before you give up? Now they are starting to mention Greece and debt default in the same sentence again so that problem definitely has not gone away. When the EU finance ministers start accepting the fact that Greece will never be able to pay its debt the only option is what most analysts believe is a default to reduce the size of the debt. Basically Greece announces it will only pay back 50% of what it borrowed. When, not if, that happens it will trigger another even bigger problem because that will force many European banks into insolvency. We will cross that bridge when we get there.
Alcoa started off the Q2 earnings season by reporting earnings inline with recently "reduced" estimates. The materials sector was supposed to post the strongest earnings growth but Alcoa said higher expenses, cost of ores and transportation costs (higher oil prices) reduced earnings. That may be exactly what the rest of the Q2 earnings cycle looks like. Higher expenses, lower sales, higher fuel costs.
These worries have already reduced S&P expectations from 15% earnings growth a couple weeks ago to 12.6% growth estimates today. However, of the 20+ companies that have already reported earnings for Q2 more than 70% surprised higher. Only 15% disappointed. If that trend holds then we are in good shape. Unfortunately those early reporters are not normally indicative of the major, which report over the next couple weeks. Actually the majors are normally better than the early reporters.
This leaves us with a thorny problem. Do we try and buy the dip on Tuesday now that we know Alcoa earnings were lackluster? Futures are down again tonight but only -1.50 so not an overly negative tape. However, there is a lot of darkness before morning.
I scanned the news on the three stocks and gave the charts a hard look. I actually feel pretty confident in revising the plays and trying again on Tuesday. The dips took some of the bloom off their recent rallies and this may be an excellent entry point. I lowered the strikes on AGU and WYNN thanks to the decline.
No Open Positions
Current Position Changes
PNRA - Panera Bread $130.12 (Short Put)
Panera is building a solid wedge with resistance at $132 that should produce a breakout any day now. That resistance has been firm for four days with progressively higher lows. Earnings are July 26th so hopefully the earnings run will help push the stock higher.
Do not enter this position unless both the S&P and PNRA are positive.
Sell short PNRA August $125 put, currently $3.20, stop $128.75
AGU - Agrium $87.06 (Short Put)
Agrium is in rally mode on the need for more fertilizer. The spring floods prevented many fields from being planted on time while others were being hit by drought. Globally there is a severe shortage of food, which means farmers get more for their crops and can afford to spend more on fertilizer. Earnings are August 3rd and AGU is currently wedging up to $90 in what could be a breakout any day now.
Don't enter this position unless the S&P and AGU are both positive.
Sell short AGU August $82.50 Put, currently $1.85, stop $85.50
Chart of AGU
WYNN - Wynn Resorts $156.89 (Short Put)
Casino stocks are rocking after recent news the business in Macau is booming. JP Morgan upgraded the casino stocks last week and WYNN went vertical. Wynn is expected to beat estimates for earnings that will be almost double the 52-cents they earned in the comparison quarter. Wynn reports earnings between July 25th and August 4th. No exact date set yet. We will want to exit before the earnings.
The dip allowed us to lower the strike for basically the same premium!
Do not enter this position unless the S&P and WYNN are both positive.
Sell short WYNN Aug $145 Put, currently $3.80, stop loss $151.75
New Covered Call Recommendations
New Long Term Recommendations
New Aggressive Recommendations
None until a positive market trend returns
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)