The markets rebounded from a massive -239 point sell off at the open to close down only -101. Rebound or sell off?

Market reporters were talking about the big rebound in the market from the very negative opening print as though it was a 101 point rally instead of a 101 point loss. It was still a loss and had the market opened flat and declined all day to end at -101 the commentary would have been a lot different.

Europe was blamed with new worries about Spain and probably Italy needing a countrywide bailout by year end. For everyone reading the various newsletters published by Option Investor this should not be a surprise. I have warned repeatedly that Greece will be back at the trough looking for more money and the too big to bail countries Spain and Italy will probably be looking for a sweetheart deal soon.

The eurozone is broken and all the king's horses and all the king's men cannot put it back together again. It never fit the first time. There were hidden cracks and odd shaped pieces but the overall picture was made to look like a political success from day one. Age has not been kind to the eurozone and it is going to get worse. There is no solution to the eventual breakup other than massive debt default by the PIIGS countries and a massive bailout where Germany forces all eurozone countries to jointly guarantee each other's debt. This will take a long time to put together, and it may not ever happen.

Meanwhile in the USA we will continue to suffer from these quarterly bouts of impending financial doom in some European country. As the headlines break the markets will fall and then the EU finance ministers will have a summit to fix it. They will announce a sweeping agreement to be finalized at some future date and the markets will rejoice and everyone goes home happy. That is until everyone tries to actually put an agreement on paper. The devil is always in the details. The details never work out and the plan is watered down, the amount of money committed is reduced and three months later we are right back to the same problem.

This is really frustrating for me as a financial writer. I realize there is no solution because I consume vast amounts, as in thousands of articles and viewpoints from other analysts over the last year, and there is no easy button to the problem.

If I continue to whine about the lack of a solution in my commentary then I am going to sour investor sentiment for everyone who reads my comments. If I don't continue to warn about future problems then I will be guilty of leading everyone down the yellow brick road on the way to a destination that never arrives.

Writing options is a mostly bullish strategy. Writing naked or cash secured puts is a bullish strategy. Writing naked calls is a bearish strategy but time and time again I have seen investors destroyed by writing calls and then getting hit with a monster short squeeze or bear market rally. Calls are significantly more dangerous than naked puts and I will seldom recommend them.

We track the search terms most people use in Google to find Option Investor. The number two term is "covered calls." In the current market environment that is also a dangerous strategy. When stocks can drop $10 in a week on some European or economic headline your position can worsen so badly that it can take 6-12 months to recover by routinely writing low premium calls on depressed stocks. Since going to the decimal system for options the covered call writing strategy has declined significantly in profitability. With options quoted in pennies and strikes in dollar increments there is very little gain in covered calls.

That brings us to tonight. Futures are down over 5 points and nothing in Europe has changed. Apple fever will control the market on Tuesday with their earnings after the bell. Apple shares traded in a 20 point range today and closed near the high of the day at unchanged. Apple analysts are predicting either blow out results or a major earnings miss because of delays in product announcements, deliveries and sales slowdowns in Europe and Asia. Who knows if they are right? Apple routinely low balls earnings guidance so they could have had a terrible quarter and still hit their low guidance. Regardless of what they announce the stock will probably move 20-30 point or more on Wednesday.

So what do we do this week? Do we tighten our suspenders, grab a handful of broker bucks and step into the freeway traffic or do we wait for rush hour to end so we can make educated bets on stock direction? During the earnings cycle we try to avoid stocks announcing earnings because of the unpredictable volatility after the report. Unfortunately that means not picking anything else in the same sector because a big miss by F5 Networks could severely impact all the other stocks in that sector. It is market reaction by association.

My problem is that nobody pays a subscription price to have me say "no picks tonight." I am supposed to be clairvoyant and be able to pick the perfect stock the day before that performs as expected regardless of whether the market is up or down -250 points at the open the next day. Good luck with that concept.

I have a hard enough time betting my own money in this market and my risk profile is pretty aggressive. One way to hedge the risk is to write puts on companies that have already reported and saw significant volatility after their earnings. I would love to write puts on CMG or ISRG but puts on $400 stocks never seem to find a lot of acceptance with readers.

I am going to try and pull a couple rabbits out of my hat today but please remember this is a very volatile market with a potentially bearish decline dead ahead. Don't make these plays unless you are comfortable with what the market might hand us over the next four weeks as we head further into the summer doldrums and a potential crash in August.

Jim Brown

Send Jim an email



Current Portfolio


Current positions

Current positions


Current Position Changes


SBUX - Starbux (Short Put)

Earnings from YUM and McDonalds and warnings about slowing European sales caused a $4 drop in SBUX over the last two days. I already had an exit written on Sunday for tonight's newsletter but the sharp decline at the open today cancelled that plan. I am not ready to take a $3 loss on Starbucks. I believe they are going to announce positive earnings on Thursday and we have six more months for this trade to turn around. Today's drop knocked SBUX down to the support of the 200-day average. I believe it is oversold and we will see a recovery. I am not recommending any changes today.

Position: Short Jan $60 Put @ $6.78, no stop.

SBUX Chart


MOS - Mosaic (Short Put - Close)

The short put on Mosaic has declined in value to 12 cents. I am recommending we close this position now for a profit rather than leave it open and risk an unpleasant surprise.

Position: Short Aug $45 Put, entry $.81, Exit now, currently .12, +0.69 gain

MOS Chart


New Short Put Recommendations


FFIV - F5 Networks (Short Put)

F5 reported earnings last week of $1.14 and matched estimates for that same amount. GAAP earnings of 91 cents were 18% higher than the comparison quarter. For a quarter where most tech stocks are expected to have trouble meeting estimates because of European sales F5 actually turned in a solid quarter. They appeared to be handling the hard times rather well.

F5 shares rallied over $10 on Wed/Thr but gave it all back on Fri/Mon. Shares bounced off support just above $90 on Monday's big market gap lower. They rebounded to close at $93.50.

Because of their decent earnings and lack of a material downturn in guidance F5 is probably a strong stock in a weak market. It can still decline but it should rally on any positive uptick in the general market.

I am recommending a September $85 put, nearly $10 OTM. The key will be a positive uptick that keeps F5 above support at $90.

This is a risky trade in a risky market. Please do not enter this position on Tuesday unless both F5 and the S&P are positive.

Sell short FFIV Sept $85 Put, currently $3.40, Stop loss $88.75

F5 Chart


IOC - Interoil Corp (Short Put)

We have played Interoil numerous times and although the stock has no redeeming factors other than high option premiums I keep coming back to it. The stock is grossly overvalued with a PE of 139. It is an oil stock but can't seem to increase production. All of its stock price is a bet on the future. Carl Icahn is an investor so possibly he sees something there that I don't.

The reason I keep coming back to this stock is simply the premium. The stock closed at $76.35 with a gain of 15 cents on Monday when the rest of the market was down. The $60 Sept put is $2.75 and that is $16 out of the money and it has high option volume. You have to use a stop loss on this stock. We need to keep a tight rein on it because it can and has moved fast in the past.

Earnings are August 13th so I will plan an exit on the 10th if possible.

Do NOT enter this position unless IOC and the S&P are both positive.

Sell short IOC Sept $60 put, currently $2.75, stop loss $71.75

IOC 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)

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.