Shorts paid the price and longs rejoiced but one day does not make a trend.

In typical EU summit fashion the market either soars on the news or plunges. There is no neutral ground. The Dow declined nearly 200 points on Monday, struggled to recover it all by Wednesday's close then declined another 200 points intraday Thursday. The closing spike plus the +278 point gain on Friday equates to a +428 point rebound. How many 200 point reversals in only one week does it take to scare normal investors out of the market? How do you invest in a market with alternating 200 point swings? Very carefully!

Friday's short squeeze was huge but the spike halted exactly at the resistance highs from June 19th on all the major indexes. That is 1,263 on the S&P, 12,900 for the Dow and 2,940 on the Nasdaq.

Dow Total Market Index Chart

Since 2010 there have been 20 EU summits on the debt crisis. Barclays said there have been ten where some plan was announced and the markets rallied over the next two days. In all but one of those instances the market was lower a week later.

This summit may be a little different since Spain, France and Italy ganged up on Germany and refused to allow any proposition to pass until Angela Merkel agreed to drop the austerity requirements on future bailouts. In the end the summit only announced a plan to make a new plan by October with hopes of implementation in early 2013 but it appeared the balance of power may be shifting away from Germany. If the debtor nations are going to join forces to prevent real fiscal responsibility in Europe then deficit spending will come back in style and temporary growth will return. While that possibility could power the markets higher next week the potential for U.S. economics and earnings to be a larger drag remains very strong.

Next week is warning week for earnings now that the quarter is actually over and all hope of a miraculous finish has expired. Companies hoping for last minute orders to save them from an earnings miss may now have to admit defeat.

Volume should be very light this week because of the holiday and worries over weak payroll numbers on Thursday (ADP) and Friday (Nonfarm) could give us a bearish direction.

That makes it tough to add new positions but I am going to take a chance.

Jim Brown

Send Jim an email



Current Portfolio


Current positions

Current positions


Current Position Changes


MJN - Mead Johnson (Short Put)

Mead Johnson was knocked for a $5 loss on Friday after a Goldman Sachs analyst cut earnings estimates for the company. He cut 2012, 2013 and 2014 estimates saying the company's business in China was weakening. The company said it saw a 22% increase in sales in Asia and Latin America in Q1 with 71% of its total revenue coming from those two markets. The improvement canceled out a 12% decline in Europe and North America. The Mead COO said sales in Asia were "modestly below the high growth rate of 2011" and business conditions were "tougher."

The gap down decline in the stock on Friday stopped us out on the short put position for a -1.90 loss.

Position closed: Short Nov $80 Put, entry $3.65, exit $5.55, -1.90 loss.

MJN Chart


New Short Put Recommendations


CELG - Celgene Corp (Short Put)

Celgene was crushed a week ago on news of a change in plans to market a myeloma drug. Shares fell -$9. A day later a Cowen & Company analyst upgraded the stock saying the sell off was overdone and the company had multiple opportunities from the 15 drugs currently in the approval pipeline. He said the company remained a buy and he reiterated they had highly visible and predictable revenue, high barriers to entry, improving margins and lower taxes. What is not to like?

Sell short CELG Aug $60 Put, currently $1.15, stop $61.25

CELG Chart


NUS - NuSkin (Short Put)

NuSkin has recovered from the beating it took when fellow marketer Herbalife was bushwhacked by David Einhorn. The stock is gaining speed to the upside and closed at a six week high on Friday.

I am picking a relatively low value $40 put in order to give us the maximum protection from market volatility. You could step up to the $45 strike for a lot more premium but we don't know what direction the market will take next week. Better safe than sorry.

Sell short NUS AUG $40 Put, currently 95-cents, stop $42.50

NUS Chart


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)

HLF - Herbalife (Short Put)

CTXS - Citrix Systems (Short Put)

MJN - Mead Johnson (Short Put)

MMR - McMoran Exploration (Short Put)

MOS - Mosaic Co (Short Put)

JPM - JP Morgan (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.