Good news from Greece produced a rally in the futures on Sunday night but it may have been fleeting.
Six different polls out of Greece over the weekend showed the pro austerity New Democrat party taking the lead from the anti-austerity party that was ahead two weeks ago. The S&P futures rallied +12 points, crude oil spiked to $92, gold hit $1583 and the dollar weakened sharply. That was Sunday night.
On Monday night all those factors reversed with the dollar regaining its levels from Friday and commodities all lost ground. The cause was a falling euro ahead if an Italian debt auction this week and economic news that pointed to a worsening of the European economy. In addition Japan said they were not going to continue monetary easing even though unemployment rose for the first time in three months.
As I said in the Option Investor commentary this weekend we are hostage to the headlines and most of those headlines are coming from Europe.
The U.S. markets may want to rally but the constant stream of negative news from overseas is making it difficult.
This week the U.S. may have some problems of its own with the GDP, ISM and multiple payroll reports. There is a real minefield of economics with the deck stacked later in the week.
I tried to find a couple plays that would be less sensitive to the general market weakness but I still want to maintain a minimal portfolio until the market resumes a positive direction. Writing options in a down market is like petting a porcupine. You have to be very careful to pick the right spot.
Cash is a position.
Send Jim an email
Current Position Changes
SBUX - Starbucks (Put Stopped)
Starbucks rebounded to slightly over $56 and hit our revised stop on the protective put at $53.25 on the way up. We were able to salvage a +1.58 gain on that protective put and the rebound suggests that a positive market will see SBUX move higher.
Closed June $55 Protective put, entry $1.06, exit $2.64, +1.58 gain.
The Short Jan $60 put remains open with no stop.
Chart of SBUX
HLF - Herbalife (Short Put)
Herbalife remained flat for last week. Evidently there are still some investors worried that Einhorn is not done. Last week I recommended we add a protective put on the position if HLF declined to trade at $43.25. That has not happened and that recommendation is still open. We have such a large premium on the short Nov $55 put that we can afford to protect it in hopes of a big win once HLF begins to recover.
Buy HLF June $42.50 Put, currently $2.55 ONLY if HLF trades at $43.25.
Chart of HLF
NUS - NuSkin Enterprises (Short Put)
Unlike Herbalife we saw Nuskin begin to show some new life. Since Nuskin was not mentioned by Einhorn at all it appears investors are starting to nibble at the oversold position.
There are eight analysts that cover NuSkin and all eight have a buy rating with an average price target of $60. There are no holds or sells.
I am raising the stop on this position to $40.50.
Raise stop Sept $40 Put, entry $4.50, stop $40.50.
New Short Put Recommendations
IOC - Interoil Corp (Short Put)
We have played IOC numerous times in the past because the volatility in the shares always guarantees high option premiums. I have always believed it was good for a short play but conditions are changing. The company finally made some major discoveries and has engaged some major players as partners.
IOC is a small company. For them to undertake any material project they have to have partners. One of their most aggressive projects is a LNG project for Papua New Guinea. They have exploration licenses covering 3.9 million acres. They have made two major discoveries. They have the Elk/Antelope find and the Bwata/Triceratops find. The second well in the Triceratops find confirmed an 1800 foot gas/liquids column in a 40,000 acre field. The initial well data was enough for Pacific Rbuiales Energy to quickly buy a 10% stake for $345 million.
The current price for IOC only values the company at 50 cents per mmcf when LNG in the region is selling for a record $18 per mmcf equivalent. The company still has to produce the gas and that means some developmental wells and building out the LNG system. However, Exxon is already build an LNG system right next door and they could easily sell the gas to Exxon.
IOC already has a contract with the government to build a LNG facility. Their partners in the deal include Mitsui.
The problem with IOC is the constant stream of headlines, some good, some questionable and that is what produces the high option premiums.
After reading a good article on Seeking Alpha (Read it here) I think there is a good possibility we could see a continued uptrend.
I am recommending the July $55 puts, currently at $5.50. Once in the position we will set a tight stop.
Enter this position only if the S&P and IOC are both positive.
Sell short IOC July $55 Put, currently $5.50, stop loss $56.50.
New Covered Call Recommendations
Long Term Recommendations
CLR - Continental Resources (Short Put)
Continental was the pioneer in the Williston Basin, otherwise known as the Bakken field in North Dakota. Continental has been drilling oil wells there for two decades.
Continental is the largest land holder in the Bakken and the CEO frequently claims there are several billion barrels of recoverable oil in the various Bakken deposits. Continental produced 85,526 Boepd in Q1. They are on track to triple production from 2009 to 2014. Output rose +66% in Q1 alone. More than 70% of that production was crude oil.
North Dakota is expected to increase production to 1.0 to 1.2 mbpd by 2015 according to CEO Harold Hamm. That would put North Dakota ahead of Texas at 1.1 mbpd of production. It would be an increase of more than 350,000 bpd from current levels and much of that production would come from Continental. The company has proved reserves of 508.4 million barrels.
CEO Hamm has been hired as Mitt Romney's energy advisor.
CLR has honored the 200-day average as support ($71) on the last three dips.
I believe CLR will continue honoring the support at the 200-day and they will post strong earnings in Q2/Q3. They are increasing production by double digits every quarter and that is a tough record that no other company can touch. The stock was punished with the energy sector in May. The sector is extremely oversold and due for a bounce.
I am going to recommend a long term play on CLR using the December $65 put. That is well under support at $71 and it gives us a visible target for a stop loss just in case the stock did fall.
Enter this position only if the S&P and CLR are both positive.
Sell short CLR Dec $65 Put, currently $6.30, stop loss $69.50.
New Aggressive Recommendations
Existing Play Recommendations
Links to original play recommendation
EXXI - Energy XXI (LT Covered Call)
RIG - Transocean (Covered Call)
SBUX - Starbucks (Short Put Spread)
XHB - Homebuilders ETF (Short Put)
HLF - Herbalife (Short Put)
NUS - Nu-Skin (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.