With the Dow/S&P now down five consecutive weeks we need to stand aside and wait for a positive trend to return. Put selling is a strategy for bullish markets.

Actually I thought we would have some better luck last week with covered calls but a -2.3% decline in the indexes was a little over powering. For the last couple weeks it was still a stop pickers market of sorts with plays like Lorillard and Weight Watchers bucking a constant stream of down days with at least a minor gain. As we saw last week that plan no longer works. WTW dropped -$10 and LO -$9. The ugly market is finally rubbing off on the recent winners.

No sector seems to be safe. Even the energy sector, which had been strong thanks to oil prices holding at $100 finally begin to recede last week.

The S&P closed on critical support at 1300 but the Dow has already broken critical support at 12,200. The S&P could see a decline to retest 1250 and the Dow is likely to test 12,000 if not lower. While there is nothing preventing a rebound there is far more weighing on the market than there is pushing it higher.

We saw terrible economics last week with the ISM Manufacturing report falling significantly to just 53.5 from 60 and barely in expansion territory. The jobs report showed only 54,000 jobs were created when analysts were expecting 185,000 just a week ago.

The economy appears to be slowing significantly and we really can't tell if it is just a reaction to the break in the supply chain from the Japan earthquake or there is something else impacting the U.S. consumer. Obviously gasoline prices are a big drag as well.

Next week only has one major economic report and that is the Fed Beige Book on Wednesday. However, Fed president Richard Fisher talks on Fed policy on Monday and Bernanke speaks on the economy on Tuesday. All could be market movers.

Because of the current market weakness I think we need to step aside and not add any new positions for a couple days and see if market direction and sentiment will change.

Jim Brown

Current Portfolio

Current positions

Current Position Changes

6/1/11: RRC - Range Resources (Stopped)

Range hit our stop at $53.75 to close the option at 45-cents for a minor gain of 30-cents.

6/2/11: WTW - Weight Watchers (Stopped)

WTW hit our stop at $77.95 to close the option at $1.10 and a minor gain of 15-cents.

6/2/11: LO - Lorillard (Stopped)

Lorillard hit the stop at $112.35 to close the option at 65-cents for a decent gain of 78-cents.

6/3/11: APC - Anadarko Petroleum

Anadarko hit our stop at 75.75 on the opening dip to close the option at 45-cents for a minor gain of 49-cents.

6/2/11: ALJ - Alon USA (Stopped)

Alon hit the stop at $11.25 on Thursday due to negative refining news and the drop in oil. The option price was unchanged from when the play was recommended and there was no volume on either the entry day or the exit day so obviously nobody took the trade. The stock declined 94-cents from the recommendation. However, we track everything for record purposes so this still goes in the books as a 94-cent loss.

New Recommendations


New Long Term Recommendations

None until a positive market trend returns

New Aggressive Recommendations

None until a positive market trend returns

Margin Requirements:

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.