The markets declined today on new earnings warnings and further problems in Europe.

Interest rates on Spanish debt rose over 7.1% and into a range that is considered unsustainable. The EU finance ministers met to hammer out details of the agreement in principle reached by the EU leaders in the late June summit. That is going to be a tough challenge because several EU countries are now saying they would rather leave the eurozone than continue paying for bills incurred by other nations.

Germany's Angela Merkel is under attack for agreeing to too much in the way of concessions and her government is in danger of collapsing. The new socialist prime minister in France is threatening to hold up existing agreements unless Germany agrees to more concessions. Things are not working out well.

In the U.S. more than 95 S&P companies have already warned about lower results for Q2. Only 29 companies have indicated they would equal or surpass earnings estimates. This ratio is significantly worse than normal.

Alcoa (AA) reported earnings that were much worse than expected with a loss of $2 million including special items and break even on an operating basis. Adjusted earnings of 6-cents beat the drastically lowered estimates by a penny. Just two weeks ago estimates were in the range of 15-17 cents. Alcoa shares sold off slightly but avoided a major decline after the company affirmed its forecasts for a +7% increase in demand in 2012. The company also predicted a coming aluminum shortage. China is expected to curtail production to bring excess inventories back into balance.

Unfortunately Alcoa's results and positive guidance are not likely to carry over into the broader earnings cycle. Alcoa is pretty much a isolated company as the major aluminum producer in the USA.

The rest of the S&P sectors are going to find tougher sledding in convincing investors there are better times ahead. Only two of the ten sectors are expected to post any earnings growth.

The weakness in Europe, the economic decline in the USA and expected earnings misses are going to make it tough for the markets to continue much higher. I tried to pick a couple plays tonight that may have some staying power. I suggest you keep positions small and be prepared to exit quickly if the market turns against us.

Jim Brown

Send Jim an email



Current Portfolio


Current positions

Current positions


Current Position Changes


CTXS - Citrix Systems (Short Put - Stopped)

The earnings warnings on Friday by Informatica and others caused the enterprise stocks to gap down significantly at the open. The entire sector was knocked for a major loss.

We had two different positions on CTXS, normal and aggressive, and both were stopped.

Position stopped: Short July $75 Put, entry $1.35, exit $1.87, -0.52 loss
Position stopped: Short Aug $75 Put, entry $2.83, exit $4.13, -1.33 loss.

CTXS Chart


New Short Put Recommendations


WLK - Westlake Chemical (Short Put)

Westlake manufacturers various chemicals including a lot of plastics of various forms for the building and manufacturing industry including PVC. Some of their products include water pipe, sewage pipe, conduits, windows and doors, etc. Business is booming thanks to the oil drilling and the housing rebound.

Last week they called $250 million in notes. They will be redeemed using cash on hand. That is always a powerful statement of a successful business.

I am recommending an August $50 put, currently $1.50.

Do Not enter this position unless the S&P and WLK are both positive.

Sell short WLK AUG $50 Put, currently $1.50, stop $53.25

WLK Chart


LEN - Lennar Corp (Short Put)

Homebuilder Lennar reported better than expected earnings in late June and said it was expanding its building program. Earnings were 21 cents compared to estimates of 17 cents. Order backlogs grew by +61% with new orders rising +40%. Operating margins rose to 9.2% and the highest since 2006-Q2 and gross margins rose to 22.5% on strong pricing trends.

Lennar shares have continued to rise since the report and are at multiyear highs. With interest rates expected to remain low for the next two years and possibly even move lower this is a good environment for the homebuilders.

Do Not enter this position unless the S&P and LEN are both positive.

Sell short LEN Aug $29 Put, currently 0.89, stop loss $29.95

Lennar 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)

CELG - Celgene (Short Put)

NUS - NuSkin (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.