Will we ever return to "normal" markets? Last week the S&P completed a -10% decline and appeared ready to retest October lows.

It looks like this week will start off with a major short squeeze after comments out of Europe about a new stability pact. In theory the stronger nations in the euro zone would bad together under an agreement that sets strict budgets, strong oversight and meaningful penalties for not complying. This core group would support each other in order to prevent the kind of financial attack currently being felt by Italy and Spain.

The process to change the treaty would take a couple years to complete and there are countries that would not or could not conform to the plan and would prevent a new treaty from being ratified. To get around this problem Merkel and Sarkozy are contemplating an agreement by those countries wanting to join the core group and willing to abide by the rules. The agreement between willing participants could be done in several weeks and provide a way to prevent the contagion from impacting those countries.

According to euro zone officials the stability pact, if signed by a majority of the euro zone nations, would allow the ECB to take a more proactive step in combating rises in interest rates on sovereign debt.

The pact, if enacted, would put a fence around the nations in the agreement. However, it would also subject those who did not join the core group to even harsher attacks that could lead to debt restructuring for those nations. The pact would protect some but leave some unguarded. Since the amount of debt in the problem nations is far more than what the EFSF can conceivably bail out this sets up some future defaults.

I see a short term benefit in protecting the core countries but long term pain for others. It does increase the chances for the euro zone to survive in some form although it may not consist of 17 countries.

Britain admitted last week it was planning for the breakup of the euro zone. Although Greece was the only country immediately at risk they suspected there could be others and because of the disastrous consequences of a breakup they were planning ahead for the event.

Here we are on Sunday night with the futures up +21 points. If we choose to enter positions at the open on Monday there is a good possibility of a gap and cr*p. Premiums will deflate at the open and then reflate if the market rolls over.

I know it is frustrating to not have any entries but it is far less frustrating than having bad entries that cost money.

We lost several positions in last week's 10% market decline. I would prefer to not repeat that process this week. Even though we took losses on two of the positions I feel fortunate that the damage was not that bad considering the steepness of the decline. If the market begins looks like it is returning to rally mode I will not hesitate to add positions.

Jim Brown

Send Jim an email



Current Portfolio


Current positions


Current Position Changes


OXY - Occidental Petroleum

OXY declined to hit the stop at $91.50 with the option trading at $3.56 for a loss of -$1.26

Short Dec $90 Put at $2.30, exit $3.56, -1.26 loss.


COG - Cabot Oil & Gas

COG declined to hit the stop at $76.50 with the option trading at $3.40 for a loss of -0.90 cents.

Short Dec $75 Put at $2.50, exit $3.40, -0.90 cent loss.


XOP - Exploration SPDR

The XOP declined to hit our stop at $48.50 on Friday with the option trading at $1.99 for a profit of 45-cents.

Short Jan $34 Put at $2.44, exit $1.99, gain of 45-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)

SD - Sandridge Energy (CC + Long Term Combo)

YHOO - Yahoo (Long Term Combo)

PHM - Pulte Homes (LT Leveraged Combo)

XOP - Oil Exploration SPDR (Short Put)

UWM - UWM ETF (Covered Call)

JJC - Copper ETF (Covered Call)

COG - Cabot Oil & Gas (Short Put)

OXY - Occidental Petroleum (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.