Two coal companies chose the same day to warn about sales and the result was a massive decline in the coal sector. Topping off the day the Fed said there were "significant" risks to the economic outlook.
Coal stocks were crushed after Alpha Natural Resources (ANR) cut its forecast for 2011 on reduced demand from the Asian steel producers. Alpha shares fell -17%. Walter Energy (WLT) cut its sales forecast because of weather and problems at several of its mines. Walter did NOT say there was a problem with demand. Walter shares declined -12%. Peabody Energy (BTU) shares fell -7% on the warnings from the other miners.
Walter "was" one of our existing plays. The -$10 drop in WLT at the open stopped us out on the play for a major loss. We can guard against some things as we setup trades but today was one of those days when nothing would have worked for Walter. A higher, tighter stop would not have changed the exit since the opening print was $10 lower.
Caterpillar declined $4.30 for the day and broke below support from the last four weeks at $82. Today's dip took us out at the stop loss at $79.75. The drop in CAT was related to the drop in coal stocks and by reference a potential decline in orders for coal mining equipment.
On a positive note we exited the VIX play on Monday for 20-cents or less. The target was 20-cents but it traded as low as 6-cents so some readers probably got a better fill. That produced a gain of $1.25 on the trade.
I went ahead and raised the stops on several positions. (in blue)
The Federal Reserve announced today they would sell $400 billion in short term treasuries and buy $400 billion in long term treasuries to further lower long term interest rates. This move was named the "Twist" in 1961 when it was first used. Unfortunately traders now have their shorts in a twist because the move was already priced in and the Fed statement contained other disclosures that were not priced in.
The Fed reaffirmed their intention to keep rates low until mid 2013. They expect inflation to continue to decline thanks to the slack in the economy and declining energy prices.
The Fed move would have been market supportive except that the twist was already priced into the market. The problem came in the economic outlook portion of the statement. The Fed said employment would remain weak and growth would remain weak.
They also said "there are significant downside risks to the economic outlook, including strains in global financial markets." The term "significant" is what shook up the market. In the prior statement the outlook sentence only said "downside risks to the economic outlook have increased."
When the Fed starts using dramatic adjectives it tends to upset the market. Traders begin to worry, "what does the Fed know that we don't know?" That worry caused a -283 point drop in the Dow to 11,125. The S&P broke support at 1190 and gave back -35 points. The Nasdaq had been up most of the day but ended with a -52 point loss.
The $64 question now is where will the market go? We have yet to retrace the rally that started on September 12th. The S&P can decline to support at 1140 without causing any serious market damage. However, a break below 1140 would begin to damage sentiment and we could see a retest of the August lows at 1101.
After a -283 point Dow decline we could see a buy the dip rally on Thursday but I am not betting on it. I recommend we hold the positions we have today and watch for a bottom to form.
Send Jim an email
Current Position Changes
See graphic for stop changes
New Short Put Recommendations
New Covered Call Recommendations
New Long Term Recommendations
New Aggressive Recommendations
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)
NVDA - Nvidia (Long Term)
CAT - Caterpillar (Short Put)
TSCO - Tractor Supply (Short Put)
IWM - Russell ETF (Aggressive Combo)
SD - Sandridge Energy (CC + Long Term Combo)
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.