Despite the ugly close on Friday it may be time to stick a toe back into the market waters.
My outlook on the market is far from positive but there may be a couple plays we can make that could be insulated from additional market declines. The selling at the close on Friday represented a trend change in my opinion. We had been seeing short covering on Friday because shorts did not want to be short over the weekend. Friday's close was exactly the opposite. Sellers were happy to be out and shorts were backing up the truck.
Monday's market depends on what happens to Greece. Several EU ministers claim there will be a resolution before Monday so the European markets won't continue their plunge. If they are right and the Greek problem is solved I believe we will gap open on Monday and the shorts will be squeezed once again.
My problem is that I don't believe any gains will stick. The market may chop around under the highs for a couple weeks or slowly move lower in a choppy reluctant fashion. I doubt we are going to see a major plunge but just a new trend that does not include new highs.
Typically when April is strong the early part of May is also strong. However, I would not call April strong since the Dow only gained 1.3% for the month or +146 points. When April is weak or flat May is normally weak. With the huge gains over the last 14 months I suspect we are going to see more "sell in May" participants this year.
I am going to take another shot at Goldman Sachs because I think the selling is overdone once again. The news about a Justice Dept inquiry on Friday knocked $15 off the stock and there is literally almost zero chance of a criminal conviction. This was a knee jerk sell on the news event.
Over the weekend Warren Buffett praised Goldman at the Berkshire Hathaway shareholder meeting. He praised Blankfein and said he was not selling his $5 billion investment in Goldman because he had every confidence in Blankfein and Goldman and thought the civil case had no merit and nothing would ever come of the Justice Dept inquiry. This should go a long way towards giving investors confidence to buy the dip.
GS - Goldman Sachs - $144.92
Goldman was slammed on the news of a Justice Dept inquiry on Friday and lost $15. Over the weekend Warren Buffett came out strongly in praise of Goldman and Blankfein at the Berkshire Hathaway shareholder meeting. I believe this will energize investors to buy the dip.
I am going to recommend the $135 put with strong support at $140. For those that want to be more aggressive I would sell the May $150 put, currently $9.80. If you think about it what else can go wrong with Goldman?
If Goldman gaps up more than $3 on Monday move to the $140 put strike.
ENTER TRADE ONLY IF GS is positive.
SELL MAY $135 PUT (GS-10Q13500) currently $3.60, stop GS @ $139.00
Chart of GS
POT - Potash - $110.50
Fertilizer stocks have been in the compost heap for the last month but it appears they may be trying to green up. POT found support at $107 since April 20th and hit a new three-week high on Friday in a very bad market. Earnings were April 29th so that threat is over.
I am recommending the May $105 Put with support at $107.
ENTER TRADE ONLY IF POT is positive.
SELL MAY $105 PUT (POT-10Q10500) currently $1.67, stop POT @ $107.75
Chart of POT
ATI - Allegheny Technologies Inc - $53.47
ATI posted earnings on April 28th that more than tripled thanks to much higher revenue. Earnings beat the street but only slightly. ATI said sales were improving in most of its markets, especially in titanium and nickel based alloys.
I am recommending the May $50 Put with support at $52.50.
ENTER TRADE ONLY IF ATI is positive.
SELL MAY $50 PUT (ATI-10Q5000) currently $0.90, stop ATI @ $52.45
Chart of ATI
WYNN - Wynn Resorts - $88.30
ATI posted earnings on April 29th of 22-cents compared to analysts estimates for 14-cents. Revenue was up +23% thanks in part to the Macau growth. WYNN garnered a couple of upgrades although it did give back $5 in Friday's ugly market.
I am recommending the May $80 Put with support at $84.00.
ENTER TRADE ONLY IF WYNN is positive.
SELL MAY $80 PUT (WYNN-10Q5000) currently $1.12, stop WYNN @ $84.00
Chart of WYNN
CREE - Cree Inc - $73.21
CREE reported earnings a couple weeks ago and spiked to more than $83 on the news. It has been a steady downtrend since with several analysts claiming it is over valued based on CREE's guidance. I think the top is in for Cree until the next earnings run.
I am recommending the May $80 CALL with resistance at $76.00.
ENTER TRADE ONLY IF CREE is negative.
SELL MAY $80 CALL (CREE-10E8000) currently $1.25, stop CREE @ $77.25
Chart of CREE
Extras for personal choice.
I looked at more than 400 stock charts in trying to find some plays for this weekend. The ones below made the top ten but I did not pick them for inclusion into the newsletter. If you want more positions you might look at these first. They will NOT be active plays in the newsletter and I am listing them as runners up to the plays I chose. A couple of them have earnings soon so be aware. All are May strikes.
PCP 135.00 Call $1.50 Earnings May 6th
PXD 60 Put 1.15 Earnings May 4th
CTRP 39 Call $1.00 Earnings May 11th
RTP 48.75 Put $1.60 (4:1 split Friday morning)
LUFK 80 Put $1.20
SLB 67.50 Put 1.01
DVN 70 Call $1.40 or 65 Put $1.45
April Recommendation History
Click here for March Results
Click here for February Results
Click here for January Results
Click here for December Results
Click here for November Results
Click here for October Results
Click here for September Results
Click here for August Results
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 just send us an email and we will use your price.