A bear market rally would definitely be appreciated this week but the outlook suggests it will only be a bear market. The futures started off deep in negative territory again on Sunday.

Fortunately they improved somewhat after the Q3 Japanese Tankan survey rallied back into positive territory at +2 from a -9 in the prior quarter. The index covering conditions at large manufacturers showed a significant improvement.

However, this is mostly the result of recovering operations from the earthquake rather than a sudden surge of new business. In Q2 the disaster weighed heavily on the survey. Japan said production had risen almost to pre disaster levels.

In the USA the Japanese auto dealers are expecting a booming quarter with new inventory rolling in daily now that the supply chain is back in operation and the parts shortages have been resolved.

That report may have caused a rebound in the S&P futures late Sunday but I seriously doubt it will have any lasting impact on the U.S. markets once they open for business on Monday.

The problem weighing on futures is still Greece. News broke on Sunday afternoon that Greece admitted it would fall short of the agreed upon deficit levels in both 2011 and 2012. Missing the targets will put Greece in violation of the bailout agreements and could prevent them from receiving the next tranche of funds in early October.

Greece unveiled new deficit targets and plans to cut the government workforce to meet the EU targets in hopes of influencing the EU meeting set for Monday. The 17 countries that use the euro will meet in Luxembourg on Monday to try and reach an agreement on releasing the next bailout payment and avert a default by Greece.

If this meeting ends badly it could send the equity markets into a dive because it would almost guarantee a Greek default over the next two weeks.

British Prime Minister David Cameron warned on Sunday the eurozone must act decisively because the situation posed "a threat to the worldwide economy."

Part of the problem with Greece and its compliance is the refusal to terminate civil servants in a very socialist country. They had committed to firing tens of thousands but only managed to lay off 20,000 and hired back 7,000. The workers they laid off they put in a "reserve" status and continue to pay them 60% of their normal pay. They also allow them to work at private jobs and collect private paychecks. Essentially they got an early retirement package, not a severance package. As part of the plan they proposed on Sunday night they would put 30,000 additional workers into this "labor reserve." This is not likely to go over well with the eurozone regulators. They want these workers terminated to reduce the government budget. That is very hard to do in a socialist state.

Greek civil servants are protected by the constitution so the government has few options other than the reserve status and allowing early retirement. If you are lucky enough to get a job as a Greek servant you have a job for life.

Unfortunately the continuing Greek tragedy will continue to roil our markets. The indexes are on the verge of retesting support from late September and without an apparent resolution in Europe the odds are increasing that support will not hold.

Fears of a recession in Europe, slowing activity in China and weak economics in the USA is causing investors to remain on the sidelines. However, I expect a positive change in sentiment by October 21st. The third quarter was the worst in three years and fund managers are losing money, customers and bonuses. They need to grab for the gusto in Q4 and try to squeeze in some gains before year end. This could overcome some of the geopolitical concerns if the early month economic reports show any improvement and the first full week of earnings does not show a significant decline in guidance.

The coming week could continue with high volatility so I am not adding any new positions today. If something changes I will add some plays when I think the margin of safety has increased. Once a Q4 rally trend appears we should be able to make some money.

Jim Brown

Send Jim an email



Current Portfolio


Current positions


Current Position Changes


TSCO - Stopped on Friday

The TSCO play was stopped out on Friday when the stock declined to the stop at $63.75. The option was trading for 95-cents at the time for a minor 15-cent gain.

LVS - Stopped on China news

Las Vegas Sands and Wynn Resorts were crushed on Thursday when China's flash PMI came in under 50 for the fourth month and the SEC said it was investigating Chinese companies for accounting irregularities. LVS and WYNN should not have any accounting problems but the combination of news headlines hammered both stocks.

The LVS put was trading for $1.37 when the stop of $41.75 was hit on the stock price. That gave us a loss of -57 cents.


New Short Put Recommendations


None


New Covered Call Recommendations


None


New Long Term Recommendations


None


New Aggressive Recommendations


None


Existing Play Recommendations


Links to original play recommendation

BAC - Bank of America (Long Term)

BAC - Bank of America (Update 8/31)

BZH - Beazer Homes (Long Term)

MDR - McDermott International (Long Term)

BK - Bank of New York Mellon (Long Term)

NVDA - Nvidia (Long Term)

TSCO - Tractor Supply (Short Put)

SD - Sandridge Energy (CC + Long Term Combo)

YHOO - Yahoo (Long Term Combo)

HPQ - Hewlett Packard (Aggressive Short Put)

PHM - Pulte Homes (LT Leveraged Combo)

SLV - Silver ETF (Short Put)

LVS - Las Vegas Sands (Short Put)

PRU - Prudential (Short Put)


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.