Silver opened at $42 on Sunday night and a decline of -12.5% but has rebounded back to $45 overnight. The dollar hit a new 30 month low. S&P futures are up strongly and Nasdaq futures are up even more. It should be a wild open on Monday and that is before the earnings and economics are released.
Hopefully the rebound in silver and gold will be enough to prevent a severe gap down open in the SLV and GLD and keep us from being stopped on those positions. Both are marginally profitable but metals prices need to stay in the current range for those profits to continue.
Crude prices had also opened lower despite a new level of intensity in Libya. The falling dollar produced a rebound in crude back to the flat line so the energy sector should be relatively safe if there ever is a safe sector.
Earnings have been strongly positive with 73% of the S&P companies beating the street. Over 320 companies have now reported. Every time I see one with a monster drop after missing estimates I am very thankful we were not short puts on those companies. Watching the big gains makes me wish we had been long those positions but over the last 14 years we have learned to not hold over earnings regardless of how strong the expectations. It simply does not pay in the long term.
That makes it very difficult to pick stocks at this point in the cycle. Either the company has earnings next week or they already announced and the gap higher/lower has passed and there is no premium left in the options.
One stock I wanted to play but decided against is MCP - MolyCorp. They have a massive 39 million share lockup expiring on May 11th. That will double the outstanding shares on a rocket stock and we should see a serious decline. MCP share fell from $62 to $40 in two weeks on the last lockup expiration. I was thinking about selling some calls on MCP but I can't get past the risk issue. We have seen MCP swing wildly over the last few months and a short call is a disaster waiting to happen. I am much more comfortable selling puts on a stock and I will be looking for MCP to find a bottom in the weeks ahead so we can do just that.
I added four plays and some optional plays so let's hope the market cooperates.
Current Position Changes
SOHU - Sohu.com $105.76 (Short Put)
SOHU posted a +41% increase in earnings when they reported back on April 25th. Revenue increased +35%. Chinese Internet stocks are hot and thanks to the volatility we can sell a $90 put $15 out of the money.
Do not enter this position unless SOHU and the S&P are both positive.
Sell short SOHU June $90.00 Put, currently $1.95, stop loss $99.25
Chart of SOHU
JOYG - Joy GLobal $100.05 (Short Put)
Joy does not report earnings until June but the other equipment makers like CAT and CMI have been knocking the cover off the ball. Joy makes mining equipment and business is booming. They posted +19% revenue growth last quarter and that is expected to rise for Q1. Earnings are expected to grow by 22% in 2011.
Do not enter this position unless JOYG and the S&P are both positive.
Sell short JOYG June $92.50 Put, currently $1.95, stop loss $96.50
Chart of JOYG
WSM - Williams Sonoma $43.40 (Short Put)
WMS reported earnings back on March 15th and has been rising ever since except for that brief decline on market weakness at the beginning of April. This is the buying season and retailers are seeing improving traffic at the malls despite the higher gasoline prices. We can sell way below support on this one.
Do not enter this position unless WSM and the S&P are both positive.
Sell short WSM June $40.00 Put, currently $0.85, stop loss $41.50
Chart of WSM
RRC - Range Resources $56.45 (Short Put)
Range reported results last week and promptly spiked higher. Production rose by +17% and is expected to continue at a +10% clip for the rest of 2011 and up to 25% in 2012. Higher oil prices are also helping. Range is in the bottom three lowest cost producers with an all in finding and production cost of 71-cents per MCF.
Do not enter this position unless RRC and the S&P are both positive.
Sell short RRC June $52.50 Put, currently $1.20, stop loss $54.25
Chart of RRC
I had some extra plays left over from my research and rather than discard them I am listing them here for anyone who wants additional candidates. These are not official recommendations and will not be tracked in the newsletter.
HP $66.35 strike $60.00 premium $0.95
RHT $47.49 strike $44.00 premium $0.95
XOP $63.73 strike $61.00 premium $1.29
COP $78.89 strike $75.00 premium $1.24
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)