Monday could be a coin toss for direction given the various news headlines crossing the wires late Sunday. Futures are still positive but -6 points off their opening highs.
I had hoped the improving conditions in Japan and the successful start of operations against Libya would calm some of the jittery nerves from last week and allow our markets to find a new direction. Crude futures spiked over $103 at the open Sunday night on the fighting in Libya and rising protests in other Arab countries. It is holding its gains at 7:PM.
The S&P futures spiked to 1281 at the open but they have pulled back to 1275 but holding at that level.
In Japan the engineers are having some success with their new power lines to the damaged reactors but the conversion has not yet been completed. They are still predicting success by Monday, which is only a few hours from now in Japan.
Unfortunately the story causing trouble for investors tonight is the appearance of radioactivity in milk, vegetables and water in Japan. While the levels are above legal limits they are not yet at levels dangerous to humans. However, the most recent news has cesium in the water in Tokyo and that is an element that can remain in the body for a long time and cause multiple kinds of cancer. This is a serious escalation of the contamination problem.
I believe this is why the futures are off their highs tonight. People the world over are scared of radiation even when it is 5,000 miles away.
I am going to recommend some positions today based on the improving news headlines. Assuming nothing new appears I think most investors have grown accustomed to the current news and will be ignoring a repeat of the old headlines.
The economic fundamentals are still improving although the rising oil prices and broken supply chain from Japan are going to be speed bumps we have to deal with.
No Open Positions
Current Position Changes
CAT - Caterpillar $105.06 (Short Put)
Caterpillar appears ready to breakout to a new high on the prospects of securing a lot of sales from quake-damaged Japan. The rebuilding effort will require a lot of heavy iron and CAT will be limited only by the depth of its backorders.
Enter this position ONLY if the S&P and CAT are both positive.
Sell Short April $100 Put, currently $1.66, stop loss $101.95
Chart of CAT
IOC - Interoil Corp $77.71 (Short Put)
We have played Interoil many times because it always has some strong premiums. The volatility over the last several months has kept it off my list. George Soros appears to be increasing his position and the gains have been very strong over the last week. We can take a position well out of the money and still get a decent premium.
Enter this position ONLY if the S&P and IOC are both positive.
Sell Short April $72.50 Put, currently $1.70, stop loss $73.50
Chart of IOC
CXO - Concho Resources $104.31 (Short Put)
Concho has declined to strong support at the 50-day average at $98 and rebounded on the strength of the high oil prices. If oil remains high as I expect due to Libya and unrest in the Middle East we should see Concho return to its highs at $110.
Enter this position ONLY if the S&P and CXO are both positive.
Sell Short April $95.00 Put, currently $1.40, stop loss $100.95
Chart of CXO
FLS - Flowserve $122.31 (Short Put)
Flowserve weakened in late February before finding support at $120 and dipping intraday to the 100-day average at $115. I believe the worst is over now for Flowserve and the strong oil prices should be continued support. The stock is in a downtrend but so is the entire market today. As long as support at $120 holds we can make some money.
Enter this position ONLY if the S&P and FLS are both positive.
Sell Short April $115.00 Put, currently $1.85, stop loss $119.85
Chart of FLS
New Long Term Recommendations
None - Still too much volatility
New Aggressive Recommendations
None - Still too much volatility
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)