The markets have traded flat for the last four days but there is still no indication of a sell off ahead.
Regardless of how many analysts continue to predict a continuation of the rally or a sell off the markets have moved exactly sideways for the last four days. Over the last four days the Dow is up +6 points, the Nasdaq +8 and the S&P +3. You can't get much flatter than that.
The bulls can point to the lack of a decline and the instant rebound from every dip as evidence of a bid under the market and a reason why we are going higher. The bears can point to the solid resistance and the lack of any follow through from last Tuesday's new three month high as a reason why the rally is losing steam.
I think I am on the side of the bulls on this one. Bonds have been selling off the last two weeks and I think that money is making its way to the equity markets. Investors are not convinced enough to buy the highs but they are definitely buying the dips.
The market is on ECB watch or as I phrased it in the weekend OIN commentary, global central bank watch. The ECB, BOE, BOJ and PBOC could launch additional easing at any time and fire up the printing presses to do it. There is a central bank put under the market.
That does not solve our problems on whether or not to buy the market at the current levels but at least the conventional wisdom suggests the downside is limited.
I remain cautious about increasing our positions significantly until we see a decent dip but I did add CRM and Ebay to the recommendations today.
Send Jim an email
Current Position Changes
HLF - Herbalife (Short Put - Closed)
The Nov $55 short put on Herbalife had declined in value nearly $10 since we instituted the position. HLF shares rebounded for two months but appear to be stalling after the big earnings bounce. I recommended we close that position and take profits ourselves since a $10 gain is no small deal! Better safe than sorry.
We closed it just in time. HLF shares began declining at the open from $54 on Tuesday and hit $49 on Friday before rebounding +4% today. Because of the gap down on Tuesday we did not make as much as profiled and ended up netting $9 per share on the trade. I am sure nobody is complaining.
Closed HLF NOV $55 Put, entry $15.80, exit $6.80, +9.00 gain.
IOC - Interoil (Short Put - Closed 8/10)
Interoil has earnings on August 13th so I recommended we close this position at the open on Friday August 10th. Shares of IOC dipped at Friday's open but we were still able to exit for a nice gain.
Closed: Short Sept $60 Put @ $2.75, exit $1.37, +1.38 gain.
SBUX - Starbux (Short Put)
We added a long put as insurance at the open on Tuesday and unfortunately SBUX spiked at that open and has been moving higher ever since. While I can't complain about a SBUX recovery I am disappointed we raised our cost in the play. I hope everyone who was in this play saw the gap open and held off on adding the long put. For those that did initiate the position it will be carried in the portfolio as recommended. The best laid plans of mice and menâ€¦
Long SBUX Sept $42 Put @ $1.08, no stop.
Position: Short Jan $60 Put @ $6.78, no stop.
MMR - McMoran Exploration (Short Put - Closed)
The August $12 put has declined in value to 19 cents for a $2.23 gain. McMoran currently has a well that is causing some severe problems and we could see negative news at any time. I recommended we close this position and capture the profit and reduce our risk.
MMR gapped open on Tuesday above $14 and allowed us to exit our put position for 15 cents. News out on Thursday pushed it lower on Fri/Mon making our exit very timely.
Close MMR Aug $12 Put, entry $2.42, exit 0.15, +2.27 gain.
FFIV - F5 Networks (Short Put - Stop Update)
FFIV spiked +$10 last week so I am raising the stop loss to $99.75. We are up over $3 on this position so there is no need to give it back if the market decides to rest.
Position: Short FFIV Sep $85 Put, entry $4.35, raise stop to $99.75.
New Short Put Recommendations
EBAY - Ebay Inc (Short Put)
Ebay shares rallied on Monday after a report on CNBC claimed they were not spinning off PayPal and sales had risen +28%. Channel Advisor Corp said the retailers sales volume in July rose +28.2% thanks to demand for cars and fixed price items. Channel Advisors said this was the biggest jump in sales since they started tracking Ebay in September 2009. Sales of fixed price goods, not sold at auction, rose +33.1% and Ebay Motors sales rose +36%.
A PayPal spinoff has been rumored for sometime but sources close to Ebay said there was no truth to the rumor at this time. This rumor may have been a trial balloon to see how analysts and the stock would act. PayPal is a major portion of Ebay's earnings and spinning it off could be both a blessing and a curse. A blessing because the stock would probably soar and produce a nice return for Ebay as value is unlocked. It would be a curse because Ebay shares would suffer significantly in the earnings dept after the split.
Either way I do not expect any spinoff in the near future. We will get plenty of warning and shares of Ebay would probably rally on the news. I think the news on the sales will keep Ebay moving higher so we can grab a few cents here with a short put.
Sell EBAY OCT $42 Put, currently $1.20, no stop.
New Covered Call Recommendations
Long Term Recommendations
New Aggressive Recommendations
CRM - SalesForce.com (Short Put)
SalesForce.com shares rose on Monday after Piper Jaffray (PJ) said the company had signed the biggest contract in history. The customer was not identified but the contract was notable because it was bigger than the recently announced $140 million sale to State Farm Insurance. Also, PJ noted that the news came in the middle of the summer quarter and not in Q4 when most deals are signed. PJ said CRM had been winning a lot of deals recently against Oracle and SAP. PJ said "The unprecedented cluster of multi-year mega-deals for SalesForce.com likely signifies a changing of the guard in the enterprise software industry." Shares rallied 4% on the news on Monday.
This is going to be an aggressive long term trade because CRM is scheduled to report earnings on August 23rd. With PJ claiming they are winning "mega-deals" I suspect the earnings will be good and some of these deals will be announced. However, that does not mean there is no possibility of a major decline if there is something in the earnings that investors don't like.
I am going to try and hedge our risk by selling a put that is $25 OTM. The November $120 put is $4.45 today. If the stock outperforms on the earnings report that premium should shrink considerably very quickly. If there is a disaster there is significant support in the $125 range.
I am not putting a stop loss on it because any material decline will happen in a gap down at the open after earnings. Stops won't matter. We have seen a lot of these stocks gap significantly lower and then rebound the same day.
THIS IS A HIGH RISK POSITION.
Sell short NOV $120 Put, currently $4.45, no stop.
CRR - Carbo Ceramics (Short Put - Not Triggered)
Two weeks ago I added Carbo as a potential play with a trigger for entry at $68.50. Carbo has begun to move higher but has not yet reached the trigger. The play remains unopened but an active recommendation.
Play description from prior newsletter.
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)
JPM - JP Morgan (Short Put)
CELG - Celgene (Short Put)
NUS - NuSkin (Short Put)
FFIV - F5 Networks (Short Put)
IOC - Interoil (Short Put)
BBY - Best Buy (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.