In what is becoming an increasingly regular pattern the S&P futures opened down sharply on Sunday night.

The problem causing the decline on Sunday was comments from Germany's economic minister saying "an orderly default for Greece could no longer be ruled out." He said the actions by Greece to reduce their deficit were "insufficient." In an article in the Die Welt newspaler he said, "To stabilize the euro, we must not take anything off the table in the short run. That includes as a worst case scenario an orderly default for Greece is the necessary instruments for it are available." By allowing the default it would "reestablish the affected states ability to function."

In the Der Spiegel magazine the German Finance Minister said he had ordered preparations to be made for a Greek bankruptcy. The two plans being considered were Greece defaulting and staying in the euro or Greece exiting the euro and reintroducing the drachma as their currency.

Over the weekend the G7 finance ministers vowed in light of the escalating problems to 'take all necessary actions to ensure the resilience of banking systems and financial markets" in the event of a default.

The rapidly increasing intensity of the comments in anticipation of a Greek default suggest the European finance ministers have finally come to the realization that Greece will never be able to pay off its debt even at the favorable terms of the bailout. With debt at 140% of GDP there is no mathematical way for a country in a state of severe recession and enforced austerity to continue to make its payments long enough to pay down the debt. Every downtick of the economy reduces government revenue while every bailout loan increases the amount of their annual debt service. You can't pay off a crushing debt load by doubling that debt load with new bailout loans to keep the country operating.

Despite all the worry over Greece I believe the market decline is temporary. If we do open down sharply on Monday it should put us very close to strong support. With the Fed expected to provide some new stimulus at the Sept 20th meeting the dips should be bought by traders anticipating that stimulus event. Personally I don't think anything they announce will be beneficial but traders should buy the market ahead of that meeting.

The wild card is of course Greece. The default concerns could continue to weigh on our market because even if traders want to get long ahead of the Fed they may be reluctant to do so if the daily news on Greece continues to get worse. Since Greece will eventually default it would be beneficial for it to happen sooner rather than later. The ECB needs to rip off the band aid, clean the wound (restructure its debts), apply some form of antibiotic ointment in the form of a restriction on future debt levels and send the patient back home to recover and rebuild without its crushing debt load.

The sooner Greek debt is restructured either by bankruptcy, default or agreement, the sooner life will return to normal for the rest of Europe and the USA.

Because we are so close to strong support at S&P 1120 I am going to add some plays this weekend. If we blow through support we will stop out and wait for a bottom to appear.

Jim Brown



Current Portfolio


Current positions


Current Position Changes


None


New Short Put Recommendations


CAT - Caterpillar $83.98 (Short Put)

Caterpillar is an international company and while business is not booming their order backlogs continue to increase. They have been hiring for months and they said on Friday they were intensifying their hiring because of the production backlog. They raised guidance in July because of the continued growth in mining and construction worldwide. The U.S. market may be flat but the rest of the world is offsetting that soft U.S. demand.

Caterpillar has strong support at $80 and any improvement in the Philly Fed Survey on Thursday should provide a reason for CAT to rally.

I am not putting any qualification on the entry because I want to take advantage of any drop at the open on Monday. However, I would NOT enter the trade if CAT gapped below $80 at the open.

Sell short CAT OCT $75 Put, currently $2.88, stop $79.75

Chart of CAT


TSCO - Tractor Supply $64.71 (Short Put)

Tractor Supply operates 1,043 stores in 44 states. They supply products for lawn, garden, farm, pets, livestock, seasonal items, clothing, agricultural, fencing, etc. They are almost like a Home Depot only their focus is more towards the farm community and rural neighborhoods. Their website TractorSupply.com will give you an idea on their product line.

Tractor Supply is expected to benefit from the rebuilding efforts after Irene and the floods impacting the entire northeast region.

The stock closed at a five week high on Friday with a decent +1.21 gain despite the -300 point drop in the Dow. This bullishness is related to their expected boom in flood sales.

Sell Short TSCO OCT $55 Put, currently $1.10, stop $59.75

Chart of TSCO


New Covered Call Recommendations


None


New Long Term Recommendations


None


New Aggressive Recommendations


IWM - Russell 2000 ETF (Short Puts, Long Call)

The IWM is the Russell 2000 small cap ETF. The index is very volatile because of its small cap, low liquidity components. Over the last two years the low was just under $59 and the high just under $87. I don't expect either extreme to be retested but that is always possible.

This is a play that will bet on the Russell moving higher over the next three months. There is decent support at 65, which equates to 650 on the Russell 2000 Index. Assuming we don't fall back into recession that support should hold. However, Greece is still the wild card and could trump any plans we make if the default occurs in an uncontrolled manner.

I am going to recommend we sell two of the December $57 puts, currently $2.58 each and buy one Dec $69 call, currently $4.83. If the market opens down as expected on Monday those prices should change in our favor to give us a slightly larger net credit on the trade. If we don't stop out we will have risk that the Russell breaks to new two year lows. However, we have unlimited upside over $69. If the Russell ETF returns to the July highs at $85 it would be a very successful trade. However, I am not expecting that. The trade will be successful with any move back over $69 since every point is pure profit.

I put this in the aggressive category because of the market volatility. Unlike an individual stock which has less than 100% beta the Russell is pure beta. That means every move in the market is exactly replicated in the IWM ETF where a stock like GE may only decline 3% on a 5% decline in the market.

Sell short TWO IWM DEC $57 Puts, currently $2.58 = $5.16 credit, stop 63.50

Buy ONE IWM DEC $69 Call, currently $4.83, stop 63.50

Chart of IWM


Existing Play Recommendations


Links to original play recommendation

COG - Cabot Oil & Gas (Short Put)

VIX - Volatility Index (Naked Call)

BAC - Bank of America (Long Term)

BAC - Bank of America (Update 8/31)

DRC - Dresser Rand (Long Term)

WLT - Walter Energy (Long Term)

BZH - Beazer Homes (Long Term)

MDR - McDermott International (Long Term)

BK - Bank of New York Mellon (Long Term)

GLBL - Global Industries (Long Term)

NVDA - Nvidia (Long Term)


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.