For whatever reason, and there have been many given, the markets are in rally mode and nothing seems to matter.
All the hype last week was focused on the weekend meetings in Europe and the potential for a comprehensive plan for fixing their debt problems and recapitalizing their banks. The markets seemed to be hoping against hope that a miracle would occur and a previously unconsidered solution would occur.
I cautioned that too much in the way of expectations was being priced into the market and Friday's short squeeze could be torpedoed by an errant comment from an EU official or the failure to really come up with a new OR comprehensive plan.
Here we are on Sunday night and it appears the devil is in the details at the EU summit. No comprehensive plan has emerged and some of the earlier suggestions for leveraging the EFSF have been shot down. It looks like the EU leaders are back to square one or at least very close to it. The S&P futures gapped down -6 points and ugly was starting to breakout all over around the world.
Then a miracle happened. Despite the negativity and the various new hurdles to a plan there were late day comments that backroom negotiations were making good progress. Where have we heard that before? I am not impressed but the futures began to turn around.
Helping to change the initial sentiment was news from Japan that exports surged +2.4% in September for the second consecutive month of growth and suggesting the country is finally making some real progress in rebounding from the earthquake and tsunami. Economic conditions declined for five straight months after the quake.
Adding to the positive headlines was the HSBC Flash Purchasing Managers Index for China that rose to 51.1 for October, up from 49.9 in September and the first time over 50 since July. This suggests China has snapped a three month streak of contractions and calms fears about a potential hard landing. New orders and backorders rebounded back into expansionary territory suggesting Q4 could be the start of a new growth spurt. HSBC believes a PMI reading over 50 in China implies a 12-13 percent annual rise in industrial output and GDP around 9%.
Asian stocks surged on the dual news with the Hang Seng rising +2.9%, Korea's Kospi +2.3% and Japan's Nikkei +1.4%. Australia's ASX 200 rose +2.3%.
The U.S. futures rebounded to +5 but there is a lot of darkness before morning. I am going to add a couple plays but we won't trigger them unless the market opens positive. There is still a huge risk Europe will disappoint and it won't matter what Asia is doing. Wednesday is the next pivot point with the meeting with the full EU leadership.
Send Jim an email
Current Position Changes
New Short Put Recommendations
New Covered Call Recommendations
UWM - Proshares Ultra Russell 2000 (Covered Call)
The Proshares Ultra Russell 2000 is a 2X fund. It seeks to return twice the move in the Russell in any single day period. Because it is a leveraged fund there are some sharp moves and there is volatility priced into the option premium.
Ordinarily I would not recommend a leveraged ETF. However, the Russell index has been lagging and I expect it to catch fire soon if the big cap rally continues to gain ground. When the Russell does find traction it could be explosive.
I am recommending this as a covered call because it appears to be on the verge of breaking through resistance at $33 and has decent support at $30. While I expect us to be called away at the end of the month I would not mind if it stayed in this range and we wrote another call on it for December.
I am recommending the Nov $34 call at $2.10. If called away that would be a profit of $3.17 at Friday's closing prices.
Don't enter this trade unless the UWM and S&P are both positive before 10:AM.
Buy Write UWM Nov $34 covered call, currently $32.93 by $2.10. Stop Loss $29.50
Chart of UWM
JJC - IPath Copper ETF (Covered Call)
The JJC is an ETN, which is similar to an ETF, only it tracks commodities. The JJC tracks the UBS Copper Subindex. Copper has been beaten severely recently on worries China was going to have a hard landing. With both Japan and China suddenly appearing to be steadily improving the fate of copper should reverse to the upside.
There is decent resistance at $44 with a close on Friday at $42. I am going to recommend the $44 covered call at $1.05 and try to capture more of the upswing in prices rather than squeeze out a few more pennies in premium. If called away we will profit $3.15 at Friday's closing prices. There will probably be a sharp spike higher at the open if Asia holds its gains.
Don't enter this trade unless the JJC and S&P are both positive before 10:AM.
Buy Write JJC Nov $44 covered call, currently $41.90 by $1.05. Stop Loss $38.75
Chart of JJC
New Long Term Recommendations
New Aggressive Recommendations
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)
SD - Sandridge Energy (CC + Long Term Combo)
YHOO - Yahoo (Long Term Combo)
HPQ - Hewlett Packard (Aggressive Short Put)
PHM - Pulte Homes (LT Leveraged Combo)
XOP - Oil Exploration SPDR (Short Put)
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.