With the market stalled at its recent highs I believe it is time to take some profits.
We are fortunate to have several positions that are almost fully depreciated and we need to take some profits this week just in case the market does not like what the ECB and Fed have to say.
At the risk of being redundant I do believe the central banks will disappoint this week and the market may not react well to the news. We can't continue to live in fear of what the market might do but for at least another week we need to be cautious until the market picks a direction.
Many might believe it has picked a direction, up, but I am not convinced. The Nasdaq just made a lower high as did the Russell. The Dow is the only index that is well above its recent range and that is because those blue chip, dividend payers, are the safest port in a storm.
The short squeeze from Thr/Fri has yet to fade but only because bears are afraid of what the banks might do and they have been burned several times recently.
I suggest we continue to be cautious until we have a better idea about direction for August. That is historically the third worst month for the markets. After the current earnings cycle where 60% of reporters have missed revenue estimates and 63% have warned on future guidance you would think the direction would be clear. However, 67% have beaten drastically lowered earnings estimates so the herd is still partially bullish.
This should be an interesting week.
Send Jim an email
Current Position Changes
MOS - Mosaic (Short Put - Closed)
The short put on Mosaic has declined in value to 12 cents. I recommend last Monday that we close this position for a profit rather than leave it open and risk an unpleasant surprise. The position was closed for record purposes at the open on Tuesday.
Position: Short Aug $45 Put, entry $.81, Exit @ .12, +0.69 gain
JPM - JP Morgan (Short Put - Close)
The August $33 short put on JPM has declined to 19 cents with three weeks remaining. I am recommending we close it on Tuesday and take profits. With JPM only $3 above the strike any bad news over the next three weeks could put us in danger.
Position: Short Aug $33 Put, entry $.87, Currently @ .19, +0.68 gain
CELG - Celgene (Short Put - Close)
The Celgene August $60 put has declined in value to 11 cents with three weeks to go. I am recommending we close this position before some drug news crashes the sector. Close the position at the open on Tuesday.
Position: Short Aug $60 Put, entry $1.14, Currently @ .11, +1.03 gain
NUS - NuSkin (Short Put - Close)
The NuSkin August $40 put has declined in value to 30 cents and we are $10 out of the money. However, NUS and HLF tend to move rapidly on any headline. NuSkin spiked $6 in the last three days and it can give that back just as quickly. I am recommending we close this position rather than wait for the next headline. Close at the open on Tuesday.
Position: Short Aug $40 Put, entry $.95, Currently @ .30, +.65 gain
IOC - Interoil (Short Put - Close 8/10, Raise Stop)
Interoil is racing to new highs but as we have seen before, what goes up can quickly come back down. IOC has earnings on August 13th so I am recommending we close this position at the open on Friday August 10th. That is still over a week away but I don't want it to slip up on us.
I am also raising the stop loss to $73.50.
Position: Short Sept $60 Put @ $2.75, Stop Loss $73.50.
SBUX - Starbux (Short Put)
Sometimes they kick you when you are down. SBUX missed earnings estimates and declined even further. I believe they are on the right track and this is a January put. We have plenty of time. I am not recommending any changes today.
Position: Short Jan $60 Put @ $6.78, no stop.
New Short Put Recommendations
New Covered Call Recommendations
Long Term Recommendations
New Aggressive Recommendations
CRR - Carbo Ceramics (Short Put)
Carbo reported earnings of $1.38 last week that beat the street estimates of $1.28. Revenue rose +19%. Sales in North America increased +17% while international sales increased +20%. You would think the news would have lifted the stock. You would be wrong.
Shares of Carbo fell -$22 from the post earnings spike at $87 to Monday's close at $65. There is no reason for the selloff. There is absolutely no news.
I follow Carbo in the Oil Slick Newsletter and it is a great company. It has ZERO debt. It makes ceramic proppant for fracturing oil and gas wells. The stock was punished since January because of the industry move away from drilling gas wells to drilling oil wells. Carbo had inventory stored near the gas fields and had to shift inventory to the oil fields but that was a temporary problem. Then analysts started worrying about competition from China. That has not materialized either.
There is no material reason for Carbo to be declining that I can find. The company has a PE of 11, no debt, 20% increase in revenue and it beat the street on earnings.
I have to assume that a large investor, probably a hedge fund, decided to exit and the decline triggered the sell stops for dozens of other holders. Sometimes there is just a perfect storm of factors that depresses a stock price without regard to its fundamentals.
I don't want to catch a falling knife but I do want to take a position the instant CRR begins to rebound. I am recommending we enter a short put position with a rebound to $68.50. The options are inflated so we should be able to capture some nice premium. I do believe it will recover.
If you want to be a little more cautious you could sell the December $55 put, currently $4.60 with strong long term support at $60.
Sell short Sept $65 Put, currently $5.40 with a CRR trade at $68.50. No stop.
Sell short Dec $55 Put, currently $4.60 with a CRR trade at $68.50. 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)
MMR - McMoran Exploration (Short Put)
MOS - Mosaic Co (Short Put)
JPM - JP Morgan (Short Put)
CELG - Celgene (Short Put)
NUS - NuSkin (Short Put)
FFIV - F5 Networks (Short Put)
IOC - Interoil (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.