Unless you live under a rock you already know the credit rating for the U.S. was cut by S&P on Friday. The S&P futures on Sunday night are down -26 points and falling. Monday's open could be ugly.

Obviously Monday is not going to be an ideal day for selling puts or writing covered calls. However, depending on the market action we could see any dip on Monday retest the lows from Friday and give us an idea if those support lows are going to hold or is the market going to continue heading south at a high rate of speed.

Obviously consumer confidence and market sentiment are both going to take a serious hit. If enough investors begin to believe the selling is overdone we could see a bottom form, probably in the Dow 11,000 range. Otherwise we may need to get our Dow 10,000 hats out of storage once again.

I believe the July payroll report is an indication the country "was" not going into a double dip recession. However, if the downgrade and resulting market meltdown seriously damages consumer confidence we could easily see wallets slam shut and spending come to a screeching halt and that could push us over the economic cliff.

The Fed meets on Tuesday and they have their work cut out for them in finding a way to stimulate the market other than QE3 or a lowering of already low interest rates by extending the maturities on their $2.3 trillion in treasuries. They need to pull another rabbit out of the hat on Tuesday.

The Dow declined more than 1600 points from its July 21st high to the August 5th low. In doing this we had several triple digit gap down opens and several position stops were hit. I am pretty sure everyone understands that it would not have made any difference which stocks we played over the last couple weeks because the market decline annihilated everything.

That includes our covered call on Range Resources (RRC) that was stopped out on Friday morning. Range held up extremely well for the last two weeks but eventually caved into the 500-point declines in the market to lose -$10 in three days. It is very tough to make good trading decisions when previously bulletproof stocks make sudden declines of that magnitude.

No plays tonight for obvious reasons.

Jim Brown

Current Portfolio

Current positions

Current Position Changes

RRC - Range Resources (Stopped)

Our covered call in Range Resources was stopped at the open on Friday for a $2.30 loss. The option premium did not decline as fast as the stock and we took a $3.40 hit on the stock decline. I would have moved the stop loss higher but I was hoping to maintain the RRC position for a couple months and continue writing calls on it until we were finally called out. I intentionally left the stop low to avoid the volatility. Unfortunately I was not counting on nearly $11 in volatility in three days. When the market recovers we will play RRC again and recover this loss.

Closed: Short Aug $62.50 Call @ $2.10, exit $1.00, profit $1.10
Closed: Long RRC stock @ $61.40, exit $58.00, -3.40 loss

New Short Put Recommendations


New Covered Call Recommendations


New Long Term Recommendations


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.