The S&P futures were down more than 15 points Sunday night but the cash market rebounded to close positive. Bullish right? Wrong!

Unfortunately, while the rebound was somewhat amazing it was far from bullish. The Dow closed +40 points off its lows but still lost -30 points. The Nasdaq finished with a one point gain but only barely clinging to critical support. The S&P finished with a fractionally positive close but also only barely above breakdown levels.

The S&P has managed a marginally higher low in three successive dips to support around 1360. The first low on April 10th was 1357, April 23rd 1359 and May 7th 1364. Clearly "traders" are looking at dips to retest that 1360 level as entry points for trades. They are buying the dip and the eager beavers are setting buy stops just above the prior lows. However, you can bet there are a lot of sell stops sitting just below those prior lows. The buyers and sellers are playing a game of chicken at 1360 and eventually one of them will win.

S&P Chart

I looked at a lot of charts tonight and it appears the markets headed lower. I know some analysts were talking about buying the dip today but volume was light and the markets only made it back to neutral territory. There were no real gains.

Granted to come back from -16 points on the futures is a decent rebound but most of that occurred before the cash open. The Dow never even made it back to the intraday highs from Friday afternoon and ended back at 13,000.

The Nasdaq did test the Friday afternoon highs as resistance and it was solid. The same can be said of the S&P and Russell 2000. The charts are suggesting a lower low ahead.

I am not really excited about adding new plays but there is one that I really want to get on the board because of the size of the premiums and likelihood of a decent gain.

Also, I failed to update the long term graphic with SBUX and XHB in the last newsletter. That has been corrected.

Cash is a position. If you prefer not to add plays in this market I completely understand. You are the manager of your personal risk profile.

Jim Brown

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Current Portfolio


Current positions

Current positions


Current Position Changes


RIG - Transocean Offshore (Short Put)

The short put on Transocean is in the money and the May expiration is fast approaching. Everything in the deepwater drilling sector is very positive and I believe RIG is going to rally as soon as the market allows it. The drop in oil prices last week killed RIG's new four week high and knocked $4 off the price. I am NOT going to recommend buying back the put. I am recommending we let the put be exercised and write covered calls on the stock in the months ahead.

No change in play

Transocean Chart


New Short Put Recommendations


None


New Covered Call Recommendations


None


Long Term Recommendations


None


New Aggressive Recommendations


HLF - Herbalife (Short Put)

Herbalife posted a +21% increase in revenue to $964.2 million and well above analyst estimates of $892.9 million. Earnings rose +26% to 88 cents and beat estimates of 70 cents. Earnings in Q4 rose +30.1% and Q3 +42.6%.

The stock was crushed after noted short David Einhorn questioned their sales plan on the conference call. I am pretty sure everyone understands that Herbalife is a multilevel. Einhorn questioned the status of their distributors and asked how many buy products for themselves rather than for resale. For the record, Herbalife responded with the following. Some 27% join to buy the product at wholesale for themselves. Another 61% buy for themselves but then resell products at retail to their friends and others. Only 12% sign up with the intention to build a big multilevel business. These numbers have been common knowledge for decades. Just because Einhorn questioned them does not mean they are bad.

Herbalife has 2.7 million distributors and sales in Q1 rose 21% and earnings +26%. That should be the end of the story. The business is booming because they have good products. Even if all 2.7 million distributors signed up just to buy the products it would still be a great business. If some portion of those are building a second income that is gravy because it involves signing up even more distributors and then getting them hooked on the products.

Because it was Einhorn asking the question the stock fell -33% and lost nearly $2 billion in market cap. If ANY other person on the call had asked the question there would have been no market reaction. Einhorn's reputation as a finder of super short opportunities caused massive investor flight from the stock. Shares had rallied from $50 to $75 over the prior three months so there was plenty of profit to be captured by prior investors.

I believe once the market cooperates and the Einhorn scare passes we will see HLF return to at least $60. It may not regain the new highs from the prior week but I do think it will rebound. HLF said it was going to buy $425 million in shares because of the severe undervaluation.

The risk point here is a speech by Einhorn on May 16th. If he does not mention HLF in his speech then the worst is probably over. If he does mention it negatively then we could see another leg down. May options expire on the 18th so I am going to recommend a protective put in the May cycle just in case.

If Einhorn rains on the HLF parade we will close both positions on the 18th.

Do NOT enter this position until HLF trades at $49.50

Sell Short HLF NOV $55 Put, currently $14.00, no stop.
Buy Long HLF May $45 Put, currently $2.45, no stop.

Chart of HLF


Existing Play Recommendations


Links to original play recommendation

GLD - Gold ETF (Short Put)

EXXI - Energy XXI (LT Covered Call)

RIG - Transocean (Short Put Spread)

SBUX - Starbucks (Short Put Spread)

XHB - Homebuilders ETF (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.