The markets declined three out of five days last week for a very minor loss. Is the profit taking over?

The market dipped at the open on Monday before rebounding to touch new highs in the afternoon. Selling began at 3:PM and the next three days posted losses. Friday saw an opening dip but then rebounded to close positive. If that was all the profit taking we are going to get then I hope all future bouts are similar.

The Dow ended the week with a 1% loss and the S&P -0.5%. While those losses were minor it was still the worst week of 2012. That should give you a clue about how relentlessly bullish the trend has been. Despite that solid trend I have repeatedly reported about the lack of conviction. This has not been a robust rally but rather a gradual meltup that started in the middle of December.

We all know this rally will eventually end. I am not expecting that next week or over the next several weeks but I do expect it to end before April is over.

I base that expectation on what is expected to be a very weak earnings cycle, slowing economics as a result of higher gasoline prices and the potential for the Fed to start letting up on the gas at the April 24th FOMC meeting. The sell in May and go away cycle this year could be especially troublesome.

For the next week I expect end of quarter window dressing to lift the markets higher. Since most of the fund purchases have already been made I am not expecting a blowout week, just a positive gain as funds try to push the S&P well over 1400 for the end of the quarter. That would make good advertising to attract fund inflows for the second quarter.

Tax payments normally weigh on the market in April but with the extreme volatility in late 2011 I doubt many investors had a lot of profits to declare at year end. Anyone with profits probably had plenty of underwater positions for offsets.

One of the sectors we should be able to count on for the next month is the price of oil. We should continue to see prices rise as headlines flow over the drop in Iranian exports.

On the downside the rising price of gasoline will be in all the headlines. We should see it move over $3.90 this week, currently $3.89 with diesel $4.84. This could weigh on the market on worries it will eventually depress the economy.

I am going to try again to add a few more plays. The negative opening on Monday prevented the plays in the last newsletter from being triggered. With the market down the following three days I was in no rush to jump in again. Hopefully window dressing will give us a good entry this week.

Jim Brown

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Current Portfolio


Current positions

Current positions


Current Position Changes


None


New Short Put Recommendations


RVBD - Riverbed Technology (Short Put)

RVBD is a network technology company specializing in LAN/WAN applications. Their stock took a hit in early March to find support at the 100-day average at $26.50. The selling appears to be over and it is trying to rebound back over $28.

Do not enter this position unless RVBD and the S&P are both positive at the open.

Sell short RVBD April $26 Put, currently $0.78, Stop $26.35

Chart of RVBD


GDP - Goodrich Petroleum (Short Put)

Goodrich is a small independent oil and gas exploration company. They have been bucking the recent downtrend in the energy sector and are currently near a six month high. They are directing 85% of their 2012 capex towards oil production and expect to increase their oil production by +135% to 165% in 2012.

The current uptrend in GDP could accelerate if oil prices improve. I considered writing a covered call but that increases the expense for the same amount of risk. The dip two weeks ago held at $18 and the dip on Thursday held above $18. I am recommending we write a June $17.50 put to gain additional premium but then close it early as the premium decreases. Once GDP moves over $20 the premium should decline quickly.

Do not enter this position unless GDP and the S&P are both positive at the open.

Sell short GDP June $17.50 Put, currently $1.25, stop $18.15

GDP Chart


XOP - S&P Exploration SPDR (Short Put)

The S&P Exploration SPDR is an ETF that focuses on those energy stocks that explore for oil and gas. This excludes the refiners and service companies. With oil prices expected to rise and the energy sector lagging over the last couple of weeks I am expecting a rebound in these stocks in the weeks ahead.

Do not enter this position unless XOP and the S&P are both positive at the open.

Sell short XOP JUNE $55 Put, currently $2.22, stop $56.50

Chart of XOP


New Covered Call Recommendations


None


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)

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)

EXXI - Energy XXI (LT Covered Call)

UGA - US Gasoline ETF (Short Put)

BNO - US Brent ETF (Short Put)

ATHN - AthenaHealth (LT Short Put)

RIG - Transocean (Short Put Spread)


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.