The Dow declined -262 points at the lows of the day and only one of our positions was stopped out.
Fundamentals came back into play for at least one day and worries over the slowing global economy plus a lot of negative earnings surprises in the U.S. knocked the major indexes back to major support levels.
The Dow closed at 13,102 and a loss of -243 points and almost the low of the day. The S&P was knocked back to 1407 but rebounded some into the close to end at 1413. The Nasdaq tried really hard to hold on to round number support at 3000 but ended -10 points below that level thanks to a decline in Apple after the iPad Mini product announcement.
The obvious question is "What happens next?" This was a critical market sentiment change brought on by the constant warnings of major companies complaining about the closing global economy. It does not appear to make much difference what sector they are in if they have a substantial business overseas. Caterpillar warned for the second time in three months about the global economy worsening. They are not alone. According to S&P more than 70% of the companies already reported have missed their revenue estimates. Fortunately 64% have still beaten earnings estimates or the markets would be trading substantially lower.
Still, the constant warnings about Europe and Asia are beginning to weigh on market sentiment. Estimates for Q4 are dropping like a rock and the election remains a dead heat. The market gets excited when Romney pulls ahead a couple points and then becomes frustrated when President Obama pulls back into the lead.
The fiscal cliff remains an issue even though the President said on Monday it would NOT be a problem. It would be fixed after the election. I am glad he is so confident since the market does not seem to share his conviction.
I waited to send this newsletter until I saw what was happening in the Asian markets overnight. Heading into the Asian open the S&P futures were up nearly +9 points. As I write this they have faded to +4.50 but there is plenty of darkness before morning.
With the futures dropping it looks more like the early gains were just a dead cat bounce after the market broke to new lows on the worst day since June. I think the odds are good we are going to test S&P 1400 and maybe Dow 13,000. I could be wrong but I don't see any point in taking on additional risk until we see how this plays out.
I was expecting a rebound into month end but the constant earnings warnings may prevent that from happening.
I am actually happy to see this dip. It will reflate option premiums and give us some great entry points if it does find a bottom in the 1400 range. No new plays until the market finds a bottom.
Send Jim an email
Current Position Changes
BMRN - Biomarin Pharma (Short Put - Stopped)
BMRN was a winner for the last couple of weeks but the sudden turn of events in the market caused a nearly $5 drop this week that stopped us out at $40.35. We did not lose any money but it was frustrating to see a winner turn into a sinner.
Short BMRN Nov $37 Put, entry $2.80, exit $2.55, +.25 gain
New Short Put Recommendations
New Covered Call Recommendations
Long Term Recommendations
New Aggressive Recommendations
Existing Play Recommendations
Links to original play recommendation
EXXI - Energy XXI (LT Covered Call)
RIG - Transocean (Covered Call)
SBUX - Starbucks (Short Put Spread)
GG - GoldCorp (Short Put)
ADSK - Autodesk (Short Put)
BMRN - Biomarin (Short Put)
CLB - Core Labs (Short Put)
SHLD - Sears Holding (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.