After an ugly day in the markets the futures are actually up for a change. I have almost forgotten how to act with a positive overnight market.
I don't think the European debt crisis has ended and I am sure there will be some volatility later in the week but great earnings from IBM, WYNN and several others appear to have improved sentiment and we might actually see a couple of positive days.
In the hindsight is 20:20 department WYNN killed their earnings and the stock is up strong overnight. We officially exited the position at the open because a buck in the hand is worth more than two in the bush. Because of the ugly market at the open we only made about buck on the exit but at least that is a dollar in profits we did not have last week. It could easily have gone the other way and that is why we normally recommend exiting before earnings.
We were stopped out on Panera at 128.75 and a minor profit of only 25-cents. Panera shares rolled over on Thursday and never recovered.
The gap down open helped us out on Range Resources. The stock gapped down about 40-cents and continued to lose about $2 intraday before rebounding at the close. We were able to enter the position for almost the quoted price on Sunday and we are now setup for a really nice covered call play. Because of Friday's spike I expect to see some further weakness in RRC but only to about the $58 level. The plan is to keep the stock and continue writing new calls until we are finally called out. The $2.50 strikes means we are always close to the money and RRC has great premiums.
A reader asked me why we don't just write longer dated calls on RRC like the January 2012. We could buy the stock today at $61 and write the Jan $65 call for $4.70. If called, and the odds would be pretty good, the profit would be $8.70 on a $61 stock. That would be a 14% profit on a cash buy and 28% on a margin buy. On some stocks I think that is a great plan. If you only wrote calls twice a year and were successful each time that is a great return. You just have to be comfortable with owning the stock for a long time.
I always worry about ending up being an accidental investor because something might happen to the stock, sector or market over a six month period and traders always convince themselves "it will come back" when sometimes it does not. I prefer to write month to month so when a change occurs I am already in a short-term mentality and I can quickly pull the exit trigger. If you want to write long term please be sure to keep stop losses in place and DON'T change them.
We did not get an entry on Western Refining because the S&P gapped lower and was never positive. I am going to update the play description and we will try again on Tuesday.
I am also adding another play tonight on ANF.
Current Position Changes
WYNN - Wynn Resorts (Position Closed)
WYNN reported blowout earnings after the bell on Monday but in order to avoid a negative surprise the recommendation was to exit at the open. The market gap lower erased about 50-cents of our profits from the closing price on Friday but we were still able to exit with a $1.05 gain.
PNRA - Panera Bread (Position Closed)
Declined to hit our stop at $128.75 on the market gap down open with the option at $3.20. This is a loss of 10-cents on the position. No harm, no foul.
New Short Put Recommendations
None in a risky market
New Covered Call Recommendations
WNR - Western Refining $20.78 (Covered call)
Western has been on a roll recently as it profits from the $20 spread between WTI and Brent prices. That spread allows Western to sell gasoline and diesel at prices indexed to Brent but buy oil indexed to WTI. It is a big win for Western.
I am going to put a wide stop on WNR at $19. While I don't expect a 10% decline it is always possible. What I expect is the possibility of WNR declining below our $21 strike and putting us in a position to sell it again next month.
Earnings August 4th.
Don't enter this position unless the S&P and WNR are positive.
Buy/Write WNR August $21 Covered Call, currently $20.78-$1.20, stop $19.00
Chart of WNR
ANF - Abercrombie & Fitch $74.46 (Covered Call)
ANF is wedging up to $75 in what looks like an impending breakout. Earnings are not until August 15th. Selected retail stores appear to be doing well while others are slipping. ANF has captured investors attention as a strong performer. I believe a breakout over $75 could shoot up pretty quickly before profit taking settles in.
Once the stock moves over $75 I am going to tighten up the stop just to avoid a painful surprise by some other retailer that rubs off on the entire sector.
Buy at the open, no restriction.
Buy-Write ANF August $75 Covered Call, currently $3.30, stop $71.75
Chart of ANF
New Long Term Recommendations
New Aggressive Recommendations
None until a positive market trend returns
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.