Analysts have been predicting a correction for three months and it never comes. Is this time different?

Thursday's rebound was technical when the S&P hit the combination of the 50-day average at 1,604 and round number support at 1,600 within minutes of each other. The dip buyers swarmed in and the rest as they say is history. That rebound left a lot of shorts nursing a losing position at the open on Friday after the payroll report came in better than expected. The combination of already being off balance and in a loss and the better payroll news caused a new wave of short covering.

However, volume was low on Friday since most of it came at the open, and volume was even lower on Monday at 5.5 billion shares. There was no conviction in the bounce. It was simply a short squeeze and not a flood of new money into the market.

Monday had no economic reports in the U.S. to provide headlines but even the good news from Japan failed to push the market higher. The Japanese market has been blamed for the last two weeks for pushing our markets lower. When it rallied +6% today on stronger than expected GDP numbers the U.S. markets failed to even close in the green.

This has got to be worrisome for U.S. investors. The -3.5% dip was bought just like the prior three dips but this time there was no conviction. Despite the Dow scoring the second best gain for the year the low volume and narrow trading range lacked the conviction needed to attract new money from the sidelines.

Monday's failure to continue the rally probably dented market sentiment. If we do head lower again the retest of 1,600 on the S&P is going to be critical. A failure at that level would suggest the arrival of the summer doldrums and the potential for a real correction later in the summer. Nobody is predicting some monster dip. It would more likely be more of a consolidation phase where the market trades flat to down for several weeks and money managers rotate money out of winners and into their new favorites.

Nobody can predict short term market direction but historically the late summer months have not been kind to the markets. Q2 earnings guidance was dismal so in a couple weeks we will be faced with another round of earnings based on cost cutting rather than increased sales. Let's hope Q2 reality was better than Q2 expectations.

The market dip last week was painful. We had two plays stopped for big losses and a couple pushed into a negative position. We have been fortunate over the last several months and our luck was due to run out eventually.

S&P futures are strongly negative late Monday evening.

Jim Brown

Send Jim an email



Current Portfolio


Current positions


Current Position Changes


IOC - Interoil (close)

A miracle has happened. Interoil finally had some concrete news to report that could be transformational to the company and the stock went down. They are so used to the headline hype from this company the real headlines were ignored. Actually there were a couple of writers that dumped on the Exxon news and soured sentiment for IOC.

The bottom line is a decline in IOC from the post headline spike of nearly $20. Support at $80 appears to be holding but that is our strike price so I am recommending an exit from this position. When a play does not go as expected it is better to take a minor loss than sit around and try to hope it back into profitability.

The chart is still showing the longer term uptrend so anyone wanting to retain the position is more than welcome to do it.

Buy to close IOC short July $80 Put, entry $7.70, currently $8.45, -.75 loss.

IOC Chart


HLF - Herbalife (Stopped)

Herbalife broke below support at $46 and Icahn did not run to CNBC to create some headlines to bolster the price. He is either distracted or confident this is a temporary dip. Unfortunately the support break triggered our stop at $42.50 and we took a serious loss. Our stop was only 41 cents from the low for the week but hindsight is 20:20. The market dip on Thursday was the last straw that caused the decline in HLF shares.

Short HLF July $50 Put, entry $3.20, stopped $8.20, -5.00

HLF Chart


SCTY - Solar City (Closed)

We had a June $42.50 short put on Solar City and the stock broke support last Monday to lose -$4.48. That put the stock price under the strike price and I recommended last week that we close the position. Shares gapped down on Tuesday to put us underwater on the position.

Closed SCTY June $42.50 Put, entry $4.60, exit $6.30, -$1.70 loss.

SCTY Chart


QCOR - Questor (Stopped)

Questor dropped to $33.22 on Thursday, the low for the week, and triggered our stop loss at $33.25. That is the worst stop hit we have had in a long time. We were stopped out by 3 cents only to see Questor rally back to $37.25 on Monday. Sometimes luck is not on our side.

Short QCOR July $32 put, entry $1.70, exit $2.40, -0.70

QCOR Chart


PHM - Pulte Homes (Close)

We have a June $23 covered call on Pulte with the stock at $20.64 today. The call has deteriorated to 8 cents. I am recommending we close the June call and sell a new July $22 call before it becomes the front month and the premium evaporates.

Buy to close PHM June $23 Call, entry .89, currently .08, +.81 gain.
Sell to open PHM July $22 Call, currently .60, no stop.

PHM Chart


New Short Put Recommendations


DDD - 3D Systems

3D has been very choppy of late but that has produced some decent put premiums. The low last Wednesday was $43.18 and the stock has moved up from there. Resistance is $50. Sell short July $42 put, currently $1.40, no stop.

DDD Chart


CTRX - Catamaran Corp

Catamaran seems to have found a bottom at $48 after trading as low as $47 two weeks ago. The volatility is huge so premiums are large. I am recommending a July $45 put with support at that $47-$48 level.

Sell short CTRX July $45 Put, currently $1.75, stop $46.85

CTRX Chart


New Covered Call Recommendations


BBRY - Blackberry

BlackBerry, formerly Research in Motion, is the whipping post for the smartphone market. Fortunately for BBRY their products are actually selling again. They are not going to beat out Apple or Android but they do have a place in the smartphone ecosystem.

They were knocked back to support last week at $13.50 and are moving up again over the last five days. I am recommending a July $15 call for 78 cents with BBRY at $13.95. If called that is a $1.83 gain on a $13.95 entry price.

Buy-write BBRY July $15 Call, currently $13.95 and 78 cents. No stop.

BBRY Chart


New Long Term Recommendations


None


New Aggressive Recommendations


None


Existing Play Recommendations


Links to original play recommendation

SCTY - Solar City (Covered Call)

HLF - Herbalife (Covered Call)

CCJ - Cameco (Covered Call)

PHM - Pulte Homes (Covered Call)

BZH - Beazer Homes (Covered Call)

GMCR - Green Mountain Coffee (Covered Call)

PPC - Pilgrim's Pride (Short Put)

SLW - Silver Wheaton (Covered Call)

BSFT - Broadsoft (Covered Call)

JASO - JA Solar (Covered Call)

HLF - Herbalife (Short Put)

SCTY - Solar City (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.