With a lot of weeping and gnashing of teeth the Greek Parliament passed the new austerity/bailout plan late Sunday night.
The S&P futures opened up +5 points before beginning to decline. Apparently the riots and parliamentary defections suggested the vote may have only been symbolic and actual implementation will be another challenge. After the initial dip the futures started climbing again.
The ruling coalition controlled 252 of the 300 seats in parliament. The vote should have been a slam dunk. However, when the actual vote arrived it was passed by a margin of 199 to 74. After the vote the two parties in the ruling coalition expelled 43 members for failing to support the measure.
The smallest member of the three party coalition with 12 members announced it would not support the bailout leaving only two parties to push the measure through. Six cabinet ministers resigned rather than vote to approve it.
Comments out of Europe immediately called into question the commitment by Greece to the plan. A German economic minister told ARD television, referring to the possibility Greece might exit the euro zone, "The big day is rapidly losing its horror."
With tens of thousands of Greek citizens rioting and buildings burning all around Athens the commitment of the citizens is definitely lacking. What they don't realize is that a default and exit from the euro currency would immediately be far worse than another round of austerity. Salaries would be cut in half or worse as a result of the new drachma instead of the euro. It would be very painful but at least it would be over in 12-18 months where the enforced austerity will last a decade or more.
The markets took a step backwards on Friday but there was no real damage done to the indexes. The S&P backed off from resistance at 1350 but that was the first real test and one not expected to pass on the first attempt.
The markets could be poised to move higher but we have several more days of frustration ahead. The next challenge will be the vote of the EU Finance Ministers on Wednesday. They are also expected to approve the Greek deal but there is always a chance of another bump in the road. Once past the EU vote we should see Greece drop out of the headlines for several weeks but heat up again as they near the $19 billion debt payment on March 20th.
On the U.S. front we have a flurry of economic reports and the FOMC minutes on Wednesday. That in addition to the EU vote makes Wednesday the next major hurdle.
As Johnny Carson would say "we have come to a fork in the road." The January rally has extended into February and is starting to look tired. Over the last 80 years there have only been eight years where the market did not pullback below the opening print for January. That would be 1258. Over the last 30 years there have been zero years where the opening print was not broken. I would say that was pretty good odds there is a dip in our future. Whether it starts next week or next month or next summer is the question.
I could easily see the S&P pulling back to 1310 for a decent pause but fund managers are so under invested I believe they would buy the dip. A retest of the highs would then be in order and that retest would determine our fate.
One analyst said this was the most hated bull market in history because everyone lacked any conviction it would continue. Yet 51% of retail traders are bullish. This conflicting sentiment suggests any further gains will remain lackluster. However, I believe a break over 1350 on the S&P could find some traction but only if the small caps begin to reverse their decline from last week. That is the sentiment indicator for the market. Watch the Russell 2000 to know what sentiment is being expressed by fund managers.
One of our new plays last week, FIO, did not make it through the first day without being stopped out. Despite volatility as referenced by the VIX being relatively low the individual sectors have been jumping up and down like a yo-yo. We caught FIO on a down day but at least the damage was not major.
I am only going to add one play today because it looks like we are headed for a significant opening gap and that is not good for most play entries. I will send another newsletter on Monday night.
Send Jim an email
Current Position Changes
CRR - Carbo Ceramics (Short Put)
When we entered the Carbo Ceramics play we added a long put just in case Carbo had not finished declining. We used a February put because if was cheap. The theory being if the play was not headed in our direction by Feb expiration then we exit both sides and find another play.
We have five days left for that decision process. Currently the long put is exactly matching the short put in offsetting gains and losses as planned. I am not exiting the play today but I am warning that we are probably going to exit later this week. There is minimal time premium on the long put but I am targeting Wednesday to exit if nothing changes. Crude oil prices are rising late Sunday thanks to the rising euro, falling dollar and tentative solution to Greece.
New Short Put Recommendations
RIG - Transocean Offshore (Short Put Spread)
Transocean Offshore is the company that owned the Deepwater Horizon rig that was operated by BP when it exploded and sank in the Gulf of Mexico. Various agencies have found 7-11 reasons for the disaster and the majority were the responsibility of BP. Transocean employees were faulted for not reacting to the pressure indicators fast enough when the well began to explode. Relatively speaking that is like closing the barn door after the horses have already left. It is possible they could have prevented the loss of the rig but we will never know. BP is going to be found responsible for the disaster with a potential shared liability by Halliburton for a bad cement job.
The court has already ruled that BP must indemnify Transocean and Halliburton for any damages because of indemnification clauses in their contracts. That means RIG and HAL will have limited out of pocket expenses if the trial was to run its course. Transocean has nearly $1 billion in insurance.
The trial is scheduled to start February 27th to establish liability. BP does not want to go to trial with RIG and HAL as witnesses for the government. BP has already said it wants to settle. The government has said it wants to settle rather than risk a negative ruling that will impact future cases for decades to come. The odds of a settlement are approaching 100% and there are only two weeks before the trial starts.
This play is to capture any spike in Transocean when a settlement is announced. I am recommending it as a bullish put spread just to prevent any material loss if something unexpected were to occur.
Buy RIG Mar $47.50 Put, currently $1.73, no stop.
Sell RIG Mar $57,50 Put, currently $8.30, no stop
Net credit $6.57
Chart of RIG
New Covered Call Recommendations
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)
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)
CTSH - Cognizant Tech (Short Put)
WFC - Wells Fargo (Combination)
CRR - Carbo Ceramics (Short Put)
JJC - Copper ETF (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.