Wednesday's decline to 1340 on the S&P was a really short dip followed by two days of gains.
The dip buyers are alive and well thanks to the expectations for a resolution on Greece and continued improvements in U.S. economics.
Tuesday is looking good as of Monday afternoon. The S&P futures spiked +7 on Sunday night after China's central bank announced it was cutting the reserve rate for the second time in two months. This was a shock to traders because inflation numbers released last week showed an unexpected rise in inflation. Some analysts thought that took another reserve cut out of the picture.
If the spike in the futures holds the S&P could move over current resistance to a new multi year high at the open on Tuesday. If the EU vote on Greece is successful that could also push futures higher.
I am concerned that too much good news sometimes works in reverse. There can be a sell the news event because traders run out of things to hope for. Markets move higher on expectations. When all expectations are met there is nothing left to bet on.
I am not saying that is going to happen this week but it will be interesting to see what happens after the EU vote on Greece. If the EU ministers approve the second bailout as expected then Greece leaves the headlines for a couple weeks. If the EU ministers put a lot of new conditions on the new bailout then we are right back in the Greek headline stew.
If the EU ministers approve it with no new conditions then the euro should rally and push the dollar lower. That would be bad for stocks and good for commodities.
We know from experience that entering new plays on a strong gap open is not normally a wise decision. However, I have some today that should work regardless of how the markets open on Tuesday.
The problem with Iran and the EU oil embargo plus the UN sanctions should keep oil prices moving higher for the next several months. Even in normal years the period of March through August is one of rising prices so this year we have the added bonus of Iran pushing prices higher. Does anyone really think gasoline prices won't rise into the summer?
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Current Position Changes
CRR - Carbo Ceramics (Short Put)
The long insurance put on Carbo was closed at 90-cents and we are now naked on the short put position. The March puts are too expensive to add a replacement. Instead I am putting a stop loss on the naked put position.
Add stop loss at $88.25 on CRR Short June $90 Put
Chart of Carbo Ceramics
WFC - Wells Fargo (Short Put Combo)
The expiring insurance put on WFC was worthless at the open on Friday thanks to a strong spike in WFC to a new nine month high. Definitely no complaints there. Rather than add a new insurance put I am recommending we add a stop loss in its place.
We instituted the position at $30.54 and I am recommending a stop at $29.75. Support has been aroung $30.10 for the last two weeks.
Add Stop Loss on WFC at $29.75.
Chart of WFC
New Short Put Recommendations
UGA - US Gasoline ETF (Short Put)
The Gasoline ETF (UGA) tracks the price of gasoline futures in a form that regular investors can use to invest or hedge against the rising cost of gasoline. The fund tracks the near term gasoline futures prices and is not leveraged.
With Iran stirring up trouble in the oil markets there is almost no chance the price of gasoline is not going higher over the summer. Some analysts are calling for prices as high as $4.50 to $5.00 per gallon. Even if Iran was not a factor the price of gasoline normally rises from March and peaks in July and August.
The put premiums are not that high but I view the risk as low. I am going to recommend an April position. The last two years we had market crashes in May that took everything down. That was mostly related to Greece but you never know what the next headline will bring.
Sell short April $55 UGA Put, currently $2.50, stop loss $53.75
Chart of UGA
New Covered Call Recommendations
USO - US Oil Fund (Covered Call)
For the same reasons I listed earlier I believe the price of WTI crude will be rising through July/August. The US oil ETF is the USO. Typically February is the seasonal low for oil prices and August is the seasonal high. We are not out of February yet and WTI is already well over $100. That equates to about $40 on the USO.
Some analysts are calling for WTI prices to hit $120 this summer and almost nobody expects oil prices to decline below $95. This "should" be a fairly safe position but there is never a guarantee.
I am not putting a stop loss on the position. Since I expect crude to rise through July on normal seasonal patterns plus the July oil embargo on Iran, I want to write a new call on the USO every month through July. If it dips a little bit we will just sell a lower call the next month. I actually expect us to be called every month and have to recreate the position for the next month. That would be the ideal situation.
Buy Write USO March $41 call, currently 70-cents. No stop.
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)
SD - SandRidge Energy (Long Term CC)
YHOO - Yahoo (Long Term Combo)
PHM - Pulte Homes (LT Leveraged Combo)
JEF - Jefferies (LT Leveraged Combo)
GLD - Gold ETF (Short Put)
WFC - Wells Fargo (Combination)
CRR - Carbo Ceramics (Short Put)
JJC - Copper ETF (Short Put)
WNR - Western Refining (Covered Call)
EXXI - Energy XXI (LT Covered Call)
RIG - Transocean Offshore (Short Put Spread)
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.