Between the European headlines, U.S. economics and the Supreme Court decision on Thursday any new plays are the equivalent of headline roulette.
I did not send out the newsletter on Sunday night because the futures were down -7 and the news coming out of Europe was negative again. I was hoping we would get a news dip this morning and rebound that would give us some indication of market direction for the rest of the week.
We got the sell off but no real rebound so there was no directional help at Monday's close. The EU summit is still on schedule for Thr/Fri and now George Soros has joined with Mario Monti in warning that a lack of a comprehensive plan from the meeting could prove fatal for the eurozone. He said the eurozone is on the brink of disintegration and time is running out. "Unless there is an agreement on the fiscal side over the next three days it could prove fatal." He said the only way to really rescue the eurozone is for joint liability and "treasury bills issued by the fiscal authority and guaranteed by the entire community." Germany has flatly refused the euro bonds proposals every time the subject has come up. Germany knows they will get stuck paying the bills for countries like Greece, Spain and Italy.
If the ECB or some "fiscal authority" issued a trillion euros of joint bonds over the coming years and then the weaker countries decided to leave the euro and defaulting on their "joint liability" then the stronger countries remaining would be left paying the debts.
These end of the world as we know it predictions for the summit this weekend has put the market on edge and I doubt it is coming back until next week. Personally I doubt the EU leaders will accomplish anything material other than kicking the can down the road another couple of months while the European economy slips further into negative territory.
Add in the weakness in the U.S. economy, declining earnings estimates and the impending Obamacare decision and the market has some serious headline worries of its own. The Chicago Fed National Activity Index fell back into negative territory at -0.45 in May. The number was reported this morning and it proved to be one more data point showing the sudden decline in the U.S. economy.
Trying to find bullish plays (premium to write) without taking on significant risk is a challenge. I am going to take a chance on two companies today that may be insulated against further declines but in a down market every ship can sink.
If you don't have to trade just to be trading I would recommend watching from the sidelines. I think we will see lower lows interspersed by some monster short squeezes. Welcome to summer.
Send Jim an email
Current Position Changes
RIG - Transocean Offshore (Covered Call)
We had a covered Nov $50 call on RIG with a stop at $44.65. We are into the stock at $54 and I did not want to be called away at $50 if it started rising. That stop was hit last week to take us out of the call for a minor gain.
I am NOT going to write another call today. The sector is declining and call premiums are worthless. We need to see several days of rebound to inflate premiums and then we can sell a new call.
Closed RIG Nov $50 Short Call, entry $2.85, exit $2.62, +0.23 gain.
New Short Put Recommendations
MOS - Mosaic Company (Short Put)
Mosaic is a fertilizer company that was upgraded by Dahlman Rose based on expectations for drought impact to crops and the need for more fertilizer for the fall plantings. The corn crop is expected to be very strong this year and that puts money into farmer's pockets. When farmers are flush with cash they buy tractors and invest in more fertilizer for the next crop cycle.
Dahlman Rose said this summer was essentially a win-win for fertilizer companies. A drought increases the need for fertilizer and a strong crop increases sales. Let's hope they are right.
Sell short MOS Aug $45 Put, currently $1.02, stop $47.95
JPM - JP Morgan (Short Put)
JPM has been all over the news recently with multiple congressional testimonies by CEO Jamie Dimon. The problem was their big trade that produced a $2-$3 billion loss. That news has passed and there are no scheduled appearances in the future. The next disclosure will be July 21st when they report earnings.
The stock has rebounded from the huge drop and in today's market it declined less than 2% on a very bad tape with other financial stocks being sold hard. I believe the worst is over. I want to sell a put close to the current price and exit it before the earnings.
Sell short JPM Aug $33 Put, currently $1.07, no stop.
New Covered Call Recommendations
Long Term Recommendations
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)
HLF - Herbalife (Short Put)
CTXS - Citrix Systems (Short Put)
MJN - Mead Johnson (Short Put)
MMR - McMoran Exploration (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.