The AAII sentiment survey last week showed a 25% drop in bullish sentiment.
The AAII bullish sentiment declined from 38% to 28% in a week and that is a dramatic drop after three months of bull market. Apparently these were fair weather bulls and the first set of storm clouds sent them running for the safety of the barn. You can't really blame them. It has been nearly four months since we have had a decent bout of profit taking. That is a lot of profit to leave exposed heading into the sell in May period.
I believe most retail investors also believed the European debt crisis had been solved. They were rudely awakened from that daydream when Spanish bond yields began to fester last week. Suddenly the too big to fail, too big to save country was teetering on the brink of Greek like crisis. When bond yields move over 6% for a country with 90% debt to GDP the debt payments rapidly become unsustainable. Spain closed at 5.99% on Friday.
Actively managed equity funds also saw their exposure to stocks cut by the largest amount since Thanksgiving week. It was not just retail investors running to cash but active fund managers as well.
This could be just a combination of profit taking, stops getting hit and option expiration pressures. However, it does not provide us with market conditions this weekend that are conducive to adding new positions. There are a ton of earnings next week and we will have a better clue for market direction by next Friday.
I am closing a couple of positions this weekend. We have built up some nice profits and like last week I don't want them to go negative on us.
The third week of April is historically the strongest week of the quarter. The six weeks after this week are historically down. While you can't bet on historical models, headline news always seems to get in the way, we can protect our positions and move to cash until a clear market direction appears.
Send Jim an email
Current Position Changes
BK - Nank of New York (Short Put/Long Call)
The Bank of New York found resistance at $24.50 and appears about ready to break support at $23.00. The bank reports earnings on the 18th and after the declined in JPM and WFC after beating estimates I don't want to risk our profits here. Close both positions.
Close Long 2013 $20 Call, entry $3.30, currently $4.50, +1.20 gain.
Close Short 2013 $20 Put, entry $3.90, currently $1.57, +2.33 gain.
Chart of BK
YHOO - Yahoo (Close Long Call)
Yahoo has failed to come through with a sale of its Asian assets and after two weeks of restructuring announcements the hoped for rally never appeared. If we exit now we can close the play with a minor profit. This was a play on the expectations for a sale of those assets and a big pop into the $19-$20 range. Yahoo's management proved they either were incapable or incompetent to close the deals even though there were multiple willing buyers. Close the call position.
Close long YHOO April $14 Call, entry $2.59, currently 0.92, -$1.67 loss.
We previously close the short put side for a $2.04 profit.
Chart of YHOO
RIG - Transocean Offshore (Watch expiring put)
Transocean is well below the strike price of our long put and holding at last ditch support. There was some good news after the bell on Friday when the court in Brazil moved the oil spill case against Chevron and Transocean away from the court where a crusading prosecutor had been charging the companies with obscene crimes and penalties for no material reason. The last case filed for $11 billion was over the spill of four barrels of oil. The court also ruled against the prosecutor in halting work by the two companies. They are both free to continue their contracts. This should provide a rebound for the stocks on Monday but a decline in oil prices Sunday night could jinx that rebound.
The long put expires on Friday so I am going to have to make a decision ASAP on what to do with the short position. Initially this position was started on the expectations for a settlement of the BP spill case in Houston. Instead of a complete settlement only a portion of the case was resolved. There is no new court date that I am aware of. Settlement talks are continuing.
Meanwhile there is a shortage of deepwater drilling rigs and prices are moving steadily higher. If the court problem was resolved this would be a $75 stock in a matter of weeks.
Don't close the long put yet but be ready.
Chart of RIG
New Short Put Recommendations
New Covered Call Recommendations
Long Term Recommendations
New Aggressive Recommendations
Existing Play Recommendations
Links to original play recommendation
BK - Bank of New York Mellon (Long Term)
YHOO - Yahoo (Long Term Combo)
GLD - Gold ETF (Short Put)
EXXI - Energy XXI (LT Covered Call)
UGA - US Gasoline ETF (Short Put)
RIG - Transocean (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.