The September rebound has failed and we appear to be headed back to retest the August lows. Many analysts are now expecting those lows to be broken.
The S&P dipped to 1,879 intraday and closed only slightly higher at 1,882. The low from August was 1,867 and the odds are very good that we will see that low tested it not broken. One of the problems is the breakdown in the biotech sector. The $BTK was down another -5% today after Valeant (VRX -16%) was subpoenaed by the House to discuss high drug prices. This suggests that lawmakers may be willing to act on price controls well before Hillary Clinton's proposal comes to fruition.
The biotech sector rallied +100% over the last 18 months and has now declined about 27%. There is plenty of profit still to be captured by fund managers who were slow on the trigger when the rout began. Managers will be selling biotechs to capture remaining profits and offset losses in other stocks.
This suggests the biotech decline is not over and that means further weakness in the Nasdaq. Many analysts are expecting further weakness in the S&P as well because many of the large cap biotech stocks like Amgen, Biogen and others are also components in the S&P. Add to that the expected post summer decline in oil prices and the energy sector will also be sinking.
The commodity stocks are imploding after an investment bank warned that the giant European commodity miner, Glencore, may not survive because of its $30 billion in debt and drastically reduced cash flow. European stocks sold off hard on Monday with the indexes down 2-3% across the board.
Many analysts are now targeting a retest of not just the August S&P lows at 1,867 but the October lows at 1,820 given all the negative currents in the market. Despite the mostly negative outlooks, we know there is probably a monster short squeeze in our immediate future. Stocks do not decline in a straight line and we need to be aware that the grossly oversold conditions can create significant temporary rebounds.
Asia opened lower on Tuesday and is expected to continue lower after China reported an 8.8% drop in industrial profits. The Chinese meltdown appears to be accelerating.
In this market, it would be suicide to try and enter new plays. We could see 5% moves in individual stocks either up, down or in both directions over the next week. The last few days of September are typically one of the worst three weeks of the year for the market and that designation also applies to the first week in October. The first ten trading days of October are known for market lows and the beginning of major Q4 rallies.
I am not adding any new positions today. I did lower the stop losses on all the existing plays and recommend we close the long side on QIHU and UAL. Once this potential retest is over and a Q4 rally begins, we should have a nice setup for a lot of directional plays into year-end.
Sometimes the best trade is the one you did not make.
Send Jim an email
The fourth column in the portfolio graphic is the earnings date. We will always exit a position before that date unless specifically mentioned otherwise in the play description. For the plays where we will not exit I added the No-X designation in the portfolio.
Current Position Changes
UAL - United Continental (Stopped)
The spike in the airlines from the prior week faded with the rebound in oil to $46.50 and the deterioration in the overall market. The transport index dropped to a four-week low on worries about global traffic and shipping. We were stopped out on the UAL put spread for a small gain. I am recommending we close the long put while it has value. I do not expect the decline in UAL to continue to the $45 strike price.
Closed Oct $50 Short put, entry .75, exit .42, +.33 gain.
Close Oct $45 Long put, entry .26, currently .17, -.09 loss.
+24 cent gain
QIHU - Qihoo Technology (Close)
We were looking good on QIHU until today. The shares had rallied to nearly $50 and out long call was positive. However, after a -$2.50 decline today it is back to even and our gain evaporated. I am recommending we close the long call on Tuesday.
Close Oct $55.00 long call, entry .19, currently .20, +.01 gain
Previously closed Oct $47.50 short call, entry 2.10, exit 2.30, -.20 loss
Net loss 19 cents.
New Covered Call Recommendations
New Aggressive Recommendations
New Long Term Recommendations
Existing Play Recommendations
Links to original play recommendation
BHI - Baker Hughes (Covered Call)
EOG - EOG Resources (Bear call Spread)
TIF - Tiffany (Bear call Spread)
UAL - United Continental (Put Spread)
OXY - Occidental Petroleum (Bear call Spread)
QIHU - Qihoo Technology (Bear call Spread)
QCOM - Qualcomm (Bear call Spread)
LVS - Las Vegas Sands (Bear call Spread)
ARWR - Arrowhead Research (Covered Call)
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.