June began the way May ended with plenty of gloom and doom and no booming rebound.

It is official. The markets are now in correction mode thanks to an ever worsening series of problems in Europe. Those problems have now spread to China, India and the U.S. in the form of a sharp decline in manufacturing for export to Europe.

This is not the contagion that analysts were afraid would happen in Europe. That worry is still growing with every passing day. The contagion we are experiencing is economic. More than half of the S&P-500 companies derive a large part of their business from Europe. The slowdown in exports to Europe plus the slowdown of consumer sales in Europe and the sharp divergence of the euro/dollar suggests Q2 earnings could be rocky.

The European recession is now impacting hiring in the U.S. as well as slowing manufacturing. China is once again in danger of a hard landing with exports to Europe down by more than 50%. India, is experiencing the same problem to a lesser degree but it is clear the economic slowdown virus from Europe is now impacting the rest of the world.

If it was just one headline the investing public could deal with it. Unfortunately it is a series of ever worsening headlines every day. What seemed inconceivable six months ago is now being accepted as acceptable today. Six months ago only those analysts on the fringe were discussing a Greek exit from the euro. Today European leaders are planning that exit and now the fringe is talking up an exit by Spain, Italy and Portugal. That could be a catastrophe of monumental proportions and is not likely to happen but the headlines continue.

With the Greek elections still two weeks away and the poll numbers changing daily the European leaders, analysts and bankers have to plan for the worst.

Unfortunately high profile leaders are using terms that strike the fear of doom into everyone with money at risk.

The head of the ECB, Mario Draghi, warned on Thursday the euro zone configuration was "unsustainable." Draghi said the central bank could not "fill the vacuum" left by the member states lack of action and claimed the zone is on the point of "disintegration."

Italy's Prime Minister, Mario Monti, warned of the "huge possibilities of contagion."

Olli Rehn, the top EU economic official, called for urgent action to "avoid a disintegration of the euro zone."

With European leaders in a panic it is no wonder the U.S. markets are in free fall. There will be a liquidity event in Europe soon where the ECB, EU, IMF and who knows what other alphabet agency will announce some sweeping program to print money, guarantee bank deposits and/or recapitalize banking systems. The amount of money flowing out of Europe is the equivalent of a bank run on a geographical scale. They have to stop the bleeding or the patients will die.

Until that event occurs and the Greek elections arrive the markets may remain weak. Any announcement is sure to cause a monster short squeeze but that could be days or weeks from now. Until then cash is a position.

S&P futures are down -5.50 Sunday night.

Jim Brown

Send Jim an email



Current Portfolio


Current positions

Current positions


Current Position Changes


CLR - Continental Resources (Put Stopped)

Crude oil prices declined -$9 from the highs for the week and the energy sector was crushed. CLR was a new short put we added last week and it only lasted a couple days before being stopped out at $69.50 when support at the 200-day average broke.

Closed CLR Short Dec $65 Put, entry $5.90, exit $8.20, -2.30 loss

CLR Chart


IOC - Interoil Corp (Short Put)

Raise the stop loss on the IOC short put to $60.75.

IOC Chart


XHB - Homebuilder ETF (Short Put)

Add a stop loss on the XHB short put at $18.95.

XHB Chart


New Short Put Recommendations


None


New Covered Call Recommendations


None


Long Term Recommendations


None


New Aggressive Recommendations


None


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)

IOC - Interoil Corp (Short Put)

CLR - Continental Res (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.