Greece was the opening headline but the real focus for the day was Spain and Italy.
The right party won in Greece but that was so "yesterday's" news. Today's news was a spike in Spain's ten year yields to 7.18% and above the level commonly seen as sustainable by analysts. Spain has more debt than Greece, Portugal and Ireland put together. Those are the three countries that have already been forced to accept a bailout from the EU. Spain is much larger than all three together and is thought to be too big to save, at least with the current EU programs.
We already know Spain is incapable of raising funds in the open market because they could not raise the 100 billion euros to bailout their own banks. If rates continue to climb they will not be able to raise money for the day to day expenses and then be forced to apply for aid like the other nations.
A bigger problem here is that every nation in the euro is required to contribute their fair share to the bailout funds to rescue other nations. With Ireland, Portugal, Greece and soon Cyprus already in bailout mode and unable to contribute that puts more responsibility on the other EU nations. With Spain and Italy rapidly heading down the bailout path that is a serious problem. Spain is responsible for 12% of the funds to be contributed to the EFSF and ESM and Italy is 18%. Adding in Portugal 2.5%, Ireland 1.6% and Greece 2.8% that means 37% of the EU contributions will be missing. Countries being bailed out will not contribute to the funds. That leaves Germany and France responsible for a much larger funding requirement. Germany is already 27% and France 20%.
The worry over Spain and Italy quickly overshadowed the situation in Greece once it became apparent the pro-bailout parties had enough votes to form a coalition government. The headlines quickly left Greece and centered on Spain and the high bond yields.
The markets quickly gave up their overnight futures gains and opened lower with the Dow moving briefly under 12,700. There was a rebound on the better than expected NAHB Housing Index at a five year high. That rebound failed and the Dow traded sideways the rest of the day to end in negative territory.
The S&P traded in negative territory most of the day and barely clung to a +2 point gain at the close. The Nasdaq was the big winner. The Nasdaq capitalized on a +6 point gain by Google, +11 point gain in Apple and +14 points for Priceline to end the day with a +22 point win.
The problem is deciding where the markets go from here. The Dow closed right at strong resistance of 12,750 and the S&P at 1,345. In theory this is where we could expect a failure. However, the two day FOMC meeting that starts on Tuesday could keep investors in the game. If there is enough interest to propel the markets just a little higher than today's resistance we could see some further short covering.
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Current Position Changes
HLF - Herbalife (Short Put)
It appears Herbalife is finally accelerating to the upside. I have canceled the protective put insurance that was never triggered and put a stop loss on HLF on the existing short put position.
Add stop loss on Short Nov $55 put at $43.45
EXXI - Energy XXI (Covered Call)
The existing Sept $38 call has declined from $1.64 to 30-cents. I want to close that call and sell a lower strike at $33. That is above resistance and we can gain a little more premium.
Close short Sept $38 Call, entry $1.64, currently 0.30, +1.34 gain.
Sell to open Sept $33 Call, currently $1.10, stop $32.15
Chart of EXXI
New Short Put Recommendations
CTXS - Citrix Systems Inc (Short Put)
Citrix is a software company that delivers IT services on demand worldwide. They are active in various types of cloud applications and virtual machine management. The business is exploding as numerous companies move to the cloud for their demand applications.
CTXS surged the last two days because of a press release showing Citrix Podio supported all major cloud sharing services. The stock broke over resistance at $77 and is pressing even stronger resistance at $80 and I believe it will breakout.
Do not enter this position unless the S&P and CTXS are both positive.
Sell short July $75 Put, currently $1.50, stop loss $76.50.
sell short Aug $75 Put, currently $3.20, stop loss $76.50.
New Covered Call Recommendations
Long Term Recommendations
MJN - Mead Johnson (Short Put)
Mead Johnson is breaking out of a recent consolidation period after declaring a dividend and having their estimates boosted by Credit Suisse. An announcement on Friday that the CEO was going to be retired and replaced by the COO barely dented the rally.
I am going to reach out to the November puts on MJN to capture a little more premium. I think they are about to break out to new highs and we should be relatively safe a $7 OTM.
Do not enter this position unless the S&P and MJN are both positive.
Sell Short Nov $80 Put, currently $3.70, stop loss $83.95
New Aggressive Recommendations
MMR - McMoran Exploration (Short Put)
McMoran is very close to completing a production test on the Davy Jones 1 ultra-deep well in the Gulf of Mexico. This is the first of several major discoveries they have made in the area and a successful production test will be seen as positive for the entire project.
However, if the test were to fail we could see MMR fall back to the $8-$9 range in disappointment. This is an aggressive position because I am expecting a big jump if the well test is successful. I am selling a deep in the money strike at $12.00 with MMR at $10. If we were to be put this stock I plan on writing calls on it until the well is completed. At that point they will probably take on a partner and that will be good for a large spike in the stock.
Do not enter this position unless the S&P and MMR are both positive.
Sell Short Aug $12 Put, currently $2.63, no stop
Existing Play Recommendations
Links to original play recommendation
EXXI - Energy XXI (LT Covered Call)
RIG - Transocean (Covered Call)
SBUX - Starbucks (Short Put Spread)
HLF - Herbalife (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.