It is Sunday night and the futures are negative again. I feel like I have seen this moving before.

Actually we have seen this movie dozens of times before. Weekend events from Europe sour sentiment and the futures take a dive on Sunday night. This weekend it is the take it or leave it offer from the private sector creditors for Greece.

Talks broke down again on Saturday and the head of the Institute of International Finance (IIF) and spokesman for the creditors committee left Athens to return to Paris. The staff that remained along with the committee members came up with a final offer for Greece.

They won't disclose to the press what the offer is but they called it their "Maximum Debt Swap Offer." Basically a take it or leave it last chance to escape without a default.

Creditors agreed in October to a 50% swap of old debt for new debt but the devil is always in the details. When it came down to putting the details on paper Greece did not want to guarantee the debt. That means if Greece continues to experience hard times, and that is a given at this point, they could just lump the new deal in with the rest of their debt and default on it. Creditors felt like they should be able to get some kind of guarantee their new debt would be senior to other debt since they will have already taken a 50% cut.

Another problem was the interest rate. The creditors wanted something in the range of 8% and a point over the current market rate on the 10-year bond. While that sounds reasonable to me since they are already taking a 50% haircut the government and EU officials wanted to offer less, significantly less. Germany wanted something in the 2.5% range while other officials were closer to 3%. The net present value of a deal with that small a yield would be more in the 75% haircut range and creditors vetoed the deal.

It is unknown what the "maximum" offer is this weekend but EU officials don't take demand very well. Who knows what will happen when the EU Finance Ministers meet on Monday but the futures are suggesting there will not be an answer.

One answer could be a default. The IMF is ready to throw in the towel on Greece. They don't believe Greece can survive with its plunging economy and 350 billion in debt. With the troika already agreeing to give them another 130 billion euros starting in March with little hope of ever getting it back, the IMF is ready to pull the plug according to comments from some high level officials.

I believe the odds of a resolution on Monday are slim.

In the U.S. the earnings have been lousy. Actually the S&P said this is the worst quarter in the last ten years. Only 55% of S&P companies have beaten estimates. The current earnings growth estimate is 3.5% to 5.4% depending on which estimate you use. That was +14.1% on October 1st. Expectations have fallen fast. Guidance this quarter has also been very mixed.

For some reason the U.S. markets continue to rise even though earnings have been lousy. The "less bad" syndrome is in full bloom. The big question of course it how long will it last?

The upside is the economy. The U.S. economy appears to be accelerating and that has analysts all in a tizzy. Almost every day some analyst is raising his S&P forecast for year end. We are only three weeks into 2012 and revisions are flying faster than rumors out of Europe.

One sector I do believe will continue to improve is the regional banking sector. I am adding Wells Fargo as a play tonight because they are more of a regional bank than a large money center bank. They have already reported earnings and did well.

IBM knocked the cover off the ball last week so I am adding Cognizant Technologies, a company that is in a similar business. Hopefully the market will expect them to do as well and we can capitalize on their success.

Our portfolio is doing really well this month so keep your fingers crossed.

Jim Brown

Send Jim an email



Current Portfolio


Current positions

Current positions


Current Position Changes


MDR - McDermott (Long Call, Short Put)

The MDR Jan $15 Call expired worthless at a cost of $1.70. The MDR Jan $14 Put expired about $2 in the money and will be exercised as I recommended on Wednesday.

We will own the stock with a cost of $14.05 with the stock trading at $12.22 today. That cost includes the cost of the call and the premium received on the put. ($14 -$1.65 +1.70 = $14.05) As soon as the March options begin trading we will sell a call against the position to further reduce our cost.


New Short Put Recommendations


CTSH - Cogniznant Technologies (Short Put)

Cognizant is a technology solutions company that provides IT consulting and outsourcing services in North America, Europe and Asia. With the strong earnings by IBM in basically the same field I am hoping CTSH will report the same results. However, earnings are Feb 8th and I have a policy about not holding over earnings. We will exit the day before the announcement.

The CTSH chart shows it to be "wedging" up to resistance at $70. I believe we will see a breakout over that resistance over the next two weeks that could retest $75. That would give us an excellent opportunity to exit for a profit.

No qualification restriction on entry.

Sell short Feb $65.00 put, currently $1.00, Stop $67.50

Chart of CTSH


New Covered Call Recommendations


None


Long Term Recommendations


WFC - Wells Fargo (Combination Play)

Well Fargo reported positive earnings last week and guided analysts to better times ahead. WFC has no exposure to Europe and they seem to have avoided many of the mortgage problems afflicting Bank of America. They are not a big trading bank so the volatility in the stock market does not impact earnings. They are originating good loans from good credits with solid collateral. I like Wells Fargo as an investment for those reasons.

The stock has been on a run of late and that continued after their earnings last week with a close at a new 9-month high. Normally I would say wait for a pullback but the intraday trend has been solid and unwavering. I am proposing a three way combination with a long and short put and a long call. The long put will limit our loss if the banking sector decides to take a breather.

No restrictions on entering this trade. A dip at the open on Monday would be beneficial.

Sell short April $34 put, currently $3.90, no stop
Buy long Feb $30 put, currently $0.66, no stop
Buy Long (2) Apr $31 Calls, currently $1.44, no stop.

Premium from Short $34 = +3.90
Premium for Long $30 = -0.66
Premium for Long $31 = -2.88 (2x $1.44)
Net credit +0.36
Maximum profit WFC over $34 in April
Risk is capped at $4 less any gain in calls.

At February expiration we reevaluate and decide to close the position or switch to a stop loss as the Feb put expires.

Chart of WFC - 90 Min

Chart of WFC - Weekly


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)

YHOO - Yahoo (Long Term Combo)

PHM - Pulte Homes (LT Leveraged Combo)

JEF - Jefferies (LT Leveraged Combo)

HITK - Hi-Tech Pharma (Covered Call)

LEAP - Leap Wireless (Covered Call)

MCP - MolyCorp (Short Put)

IOC - Interoil Corp (Short Put)

MMR - McMoran (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.