Today's +293 point Dow gain was great but that only recovered about 62% of Tuesday's loss. Add in the -115 loss for Monday and the rebound has recovered 50% of the loss for the week.
I would love to see the markets continue higher from here but this is September and the worst month of the year for the markets. With the problems in China and the Fed meeting in two weeks, the odds are better for a continued decline than a continued rally.
As we near the end of the year for equity funds the managers are faced with a dilemma. If they do not sell now and the market continues lower they are at risk of losing all their gains for the year. Many are already in negative territory and probably do not want to drop any further.
Investors are withdrawing money like crazy. They withdrew more money in August that any month back to 2001. That is not likely to stop as long as the markets are volatile.
Given the 300-600 point intraday swings over the last two weeks I am really hesitant about adding new positions. We could easily see a headline generated short squeeze that runs for 500 points and it would also be possible to see the lows from last week retested. This is not the time to be selling premium because there are no low volatility stocks today. The entire market is volatile and multiple dollar gains and losses on individual stocks has been the pattern for the last two weeks. Until that changes we need to be patient. S&P futures were up +10 at one point tonight and now they are flat again.
I did add one new September play on HP. They were cut to a sell by BMO today and I expect oil prices to roll over now that the headlines are old news.
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Items shaded in blue were previously closed.
Current Position Changes
Stop Loss Updates
Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.
WLL - Whiting Petroleum (Stopped/Reenter)
Timing is everything. On Wednesday I recommended a bear call spread on Whiting with WTI at $38.68. By Monday's close the short squeeze had propelled crude to $49.30 and a +30% gain. The spike came on comments from Putin that Russia and Venezuelan president Maduro were meeting in China on Wednesday to discuss stabilizing oil prices. An OPEC official said they would always be open to discussing a stabilization program as long as all producing countries took part. Venezuela called for an emergency OPEC meeting to cut production. With all these headlines, the legions of traders short oil were squeezed for that 30% rebound.
While the rally is not likely to last the damage to the Whiting position was done and we were stopped out for a minor loss.
Nothing is likely to come from the meeting in China. Venezuela cannot meet its quota because of economic challenges. Putin is not going to cut production because Russia is bleeding cash thanks the sanctions over Ukraine. China does not want higher prices because they are importing about 8 million barrels per day. Cheap oil is great for them.
I am recommending a new short entry if WLL trades at $17.25.
Closed Sept $17 short call, entry $1.00, exit $1.40, -.40 loss
Retain Sept $22 long call, entry .20, currently .50, +.20 gain.
If WLL trades at $17.25
Sell short Sept $20 call, currently $1.00, stop loss $19.25
HP - Helmerich & Payne (Bear Call Spread)
HP is a contract driller. They secure 5-year contracts for new rigs and then build a rig for that customer and lease it to them on an operating basis for the equivalent of a full payout of the cost. At the end of five years, they continue to lease it to somebody but the rig is paid for. They build the best rigs in the business and can drill wells faster than anyone else because of the quality of the rig. Their gross margins are about 46%.
While that sounds like a sweet deal and a great company to own there are some drawbacks. BMO Capital estimates that 61% of their rigs are contracted at 33-50% above the current market because the leases were signed at the top of the market. We do not know how many of the leases have been terminated or how the penalties will factor into HP earnings. BMO believes HP will experience negative cash flow over the next several quarters as those terminated rigs are put back to work at a significantly lower lease rate or simply stacked at no income until the oil market recovers. They believe HP will have to cut the dividend to conserve cash. Today BMO downgraded HP from neutral to underperform and lowered the price target from $65 to $48. HP closed just under $55 today.
HP shares are in the same slump as everyone else and with the downgrade they could set a new low under $50 if oil prices roll over as expected.
Earnings Nov 12th.
Sell short Sept $60 call, currently .60, stop loss $57.85
Buy long Sept $65 call, currently .20, no stop.
Net credit .40
Existing Play Recommendations
Links to original play recommendation
HOT - Starwood Hotels (Bear Call Spread)
QRVO - Qorvo Inc (Bear Call Spread)
YUM - YUM Brands (Bear Call Spread)
BABA - Alibaba (Bear Call Spread)
BITA - Bitauto Holdings (Bear Call Spread)
WLL - Whiting Petroleum (Bear Call Spread)
WYNN - Wynn Resorts (Bear Call Spread)
SWKS - Skyworks (Bull Put Spread)
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.
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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.