The Nasdaq finally assumed the leadership role but techs were unable to lift the Dow out of the profit taking doldrums. The heavy schedule of earnings and economics produced some early week volatility as traders get setup for the FOMC announcement and press conference on Wednesday.
The S&P dipped immediately at the open but recovered to positive territory for a couple minutes at 9:50. Unfortunately the coal plays WLT and BTU went negative at the open and never recovered so our entry was not successful. The silver ETF started out in the green and was still in positive territory when the S&P rebounded at 9:50 so that entry was successful.
Silver hit a high of $49.82 overnight but after trading over five hours without moving higher to break $50 the sellers appeared and there was a -$4 dip to the lows of the day at $45.64. A lot of this volatility was due to the May futures contract expiring tomorrow.
The dollar rebounded early in the morning and that helped take some of the luster off silver and gold and also pushed oil prices lower. I think this rebound in the dollar will be temporary. There are too many factors working against the dollar in the long-term.
I left the WLT and BTU positions as active recommendations with the same qualifications for Tuesday.
Current Position Changes
BTU - Peabody Energy $64.93 (Short Put)
Peabody reported earnings last week that beat estimates despite a drop in production in Australia due to the floods. Peabody said the price of coal from that region rose +43% in Q1 because of the shortages and that increase offset the production loss. Peabody believes we are seeing a global coal supercycle where demand is growing faster than supply. More than 700 gigawatts of new coal fired electrical generation plants are either planned or under construction. That represents new demand for 2.5 billion tons of coal.
I believe investors will buy Peabody for this future demand now that they know the financial damage from the flood was minimal.
Do not enter this position unless BTU and the S&P are both positive.
Sell short BTU May $67.50 Put, currently $3.55, stop loss $63.50
Chart of BTU
WLT - Walter Energy $135.34 (Short Put)
Walter reported earnings last week that more than doubled from 77-cents to $1.53 per share and said the price it had received for its coking coal was the third highest ever. With coal demand surging and Walter's recent acquisition of Western Coal on April 1st. the company is poised to earn even more in the years ahead. Walter rallied +$5 after the earnings and I expect the coal rally to continue.
Do not enter this position unless WLT and the S&P are both positive.
Sell Short WLT May $130 Put, currently 3.35, stop $131.50
Chart of Walter
New Long Term Recommendations
New Aggressive Recommendations
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.