I really wish we could go back to a normal trading environment. Unfortunately the problems in Europe, Northern Africa and the Middle East along with our own economic challenges are probably going to be with us for many months to come.
While our markets are closed for trading on Monday the European markets are not and they are likely to trade lower as the sovereign credit crisis heats up. There are multiple events in progress involving Germany, France, Greece, Italy, IMF and ECB and they all point to the crisis coming to a head over the next couple weeks. The odds of a peaceful solution are becoming worse as each day passes. The likelihood of a Greek default and withdrawal from the EU is increasing. This will cause severe banking problems in Europe.
How this will impact our markets is unknown but the futures are trading sharply lower on Sunday night and there is still 36 hours before our markets open on Tuesday.
Initially I expect our markets to trade lower. However, once Greece does default the market may take a deep breath and then move on to some new problem. In reality most analysts and institutional investors have been pricing in a Greek default for many months. The actual event may be anticlimactic. Our markets have already moved into bear market territory with the S&P falling -18.8% since the July 7th high of 1356 to the August low at 1101.
I could easily see a retest of the 1100-1120 level on a worsening Europe problem but I think the market is ready to shake off all its global worries and begin focusing on earnings once again.
Now that we are past the Labor Day weekend we should see traders begin to settle down and begin planning what they want to hold for year-end and how they want to be positioned for 2012. Buying bonds at this level is a lowing proposition. The Fed is likely to announce some new stimulus program in a couple weeks and that will keep yields even lower for many more months.
The only place to be is in stocks and commodities. With the Euro likely to decline as Greece circles the drain the dollar will rise and that takes commodities out of favor as an investment. Stocks may end up being the only game in town.
September is historically the worst month of the year for the markets. October is known for the big declines but it is also known for big rebounds so many times it ends with a gain. October is known as the bear killer month. September for five of the last six years has been positive. The 2008 recession drop was the exception. September has seen gains because August has been so bad. Obviously the August we just exited was no exception with a major correction.
While there is nothing to prevent us from continuing lower I believe we are at or near the bottom. Sellers are exhausted. Volume has been enormous and anyone who wanted to sell had plenty of opportunity. Cash levels at funds are very high with some funds holding close to 50% and quite a few in the 25% range for cash. There is plenty of dry powder if they choose to use it. They raised cash for redemptions and $35 billion was withdrawn from equity funds in the month of August. Once those redemptions slow, which they will if the market turns positive, those funds will put the remaining cash back to work.
The U.S. economy has takes some hits over the last 60 days but most of it was self-inflicted. The debt debacle was ugly and it seriously damaged consumer confidence. Fortunately consumers have a short memory and now that the threat of default and the credit downgrade are behind us we should see sentiment improve at least for the rest of 2011. Once the political campaigns shift into high gear the candidates will be throwing all the economic mud on the wall they can find in hopes some of it will stick on their opponents. Hopefully some candidates will run on hope and change in 2012 instead of reliving the events of the last several years over and over again.
I do believe the market will finish the year higher. That may be a leap of faith today but I think most of the bad news is already priced into the market.
For next week I do expect us to trade lower even if it is only for a short time. For that reason I am not adding any stand alone short puts today but maybe we can add some on Wednesday. For today I am adding a couple additional long-term free trades. As long as we can bet on the future without any material cost or risk today I think that is a good plan at least until the market starts moving up again.
For everyone that missed the initial Bank of America trade I think you are going to get another chance. The banking lawsuits announced on Friday knocked BAC for an 8% loss and it may not be over. Tuesday should see another decline. BAC is not in danger. They have $450 billion in cash and securities and over $1 trillion in deposits. They could write a check for the $57 billion in mortgages FHFA is suing them over and be done. Secondly, FHFA is suing them for "losses" on the $57 billion in mortgages they sold not for $57 billion. It sounds better in the press to use the big numbers. I view this as another buying opportunity for long-term holders.
I am starting a new section this week with links to all the existing play descriptions. Normally our plays last a week or two but with the growing list of positions that will last for months I thought new readers over that period might want to see why we launched those trades.
Current Position Changes
New Short Put Recommendations
New Covered Call Recommendations
New Long Term Recommendations
BK - Bank of NY Mellon $19.95 (Short Put, Long Call)
The Bank of New York Mellon has taken some hits over the last year, which culminated in the termination of its CEO last week. This is a positive event once the smoke clears. BNY is not a normal bank like U.S. Bank or Wells Fargo. BNY is basically a corporate bank that manages investments, assets and provides securities services, clearing, Treasury services and stock issuer services. They are a major clearing house for corporate security issuance. If you were a major corporation like Exxon or Caterpillar they would handle your shareholder services like keeping track of stockholders, dividend payments, changes in ownership, etc. As such they don't have the same risk from the economy as a bank like WFC or USB.
They have recently hired Credit Suisse to sell their Alcentra unit, which manages about $17 billion in assets including high-yield bond funds.
They were not one of the 17 banks sued by FHFA because they were not active in the mortgage market. This makes them a port of safety in the financial sector for investors looking to maintain exposure to the sector but move away from more risky banks. However they did function as trustee for 530 securitization trusts that held the underlying bonds. That puts BNY in the position of representing the people who bought the securities rather than on the hook as a seller of the securities.
The CEO was replaced Gerald Hassell, the bank's 59-year old president. He has worked for BNY for 38 years and started out as a management trainee. He became president in 1998 and assumed the Chairman/CEO job last week. Richard Bove said Hassell understands BNY better than anyone on the planet. The departing CEO Robert Kelly ran Mellon Bank before it was acquired by BNY in 2007 and he ascended to CEO the combined entity.
Bank analyst Richard Bove was talking up BNY last week saying they have a market cap of $25 billion but they have $98 billion in cash and they earn money every quarter. Bove said they had upside potential of at least 100%. They are $20 now so that would be $40. Prior resistance is $32 but that would still be a nice gain.
My theory here is that BNY was unjustly sold simply because they are a bank and the banking sector has been crushed. Eventually it will turnaround. Without the same problems as the retail banks or the trading banks like GS and JPM it has less market risk.
Using a combination play we can get a free ride from $20. I am recommending we buy the Jan 2013 $20 Call, currently $3.35 and sell the Jan 2013 $20 put, currently $3.65. That gets us a small net credit to enter the transaction and any move over $20 by 2013 is 100% profit. The risk is of course that we could own the stock for $20 if it does not rebound before then. I think that is a sound investment with minimal risk. There is also the possibility of a takeover at this depressed level but until the other banks get out from under their mortgage cloud I view that as unlikely.
Buy BK Jan 2013 $20 Call, currently $3.35, no stop, no target.
Sell short BK Jan 2013 $20 Put, currently $3.65, no stop, no target.
Bank of New York Mellon Chart
GLBL - Global Industries $4.57 (Short Put, Long Call)
Global Industries provides construction and subsea services to the offshore oil and gas industry in the North America, Latin America, and the Asia Pacific/the Middle East regions. The company's services include pipeline construction, platform installation and removal, construction support, diving services, diverless intervention, and marine support services.
They have business segments around the world but they were hurt by the permit moratorium in the Gulf of Mexico. When the current administration decided they did not want any more well disasters before the 2012 elections they put a hold on permits and well exploration and construction in the Gulf died. After several suits brought by various energy companies the Interior Department started releasing permits on a limited basis early this year. Unfortunately work does not start the day a permit is issued. It takes months to organize all the components needed to drill a well and then months to complete the well if it is successful. This led to about a 12 month drop in activity in the Gulf and Global's earnings suffered. The stock declined from $10 to $3. Now that activity is returning and the Interior Department has been forced to speed up permit approvals the outlook for Global is good.
This is a cheap stock and I view this trade as having almost zero risk. Short of another moratorium in the Gulf or another well disaster the exploration activity will continue to accelerate. With the resumption of the normal 30-90 day permit approval process the Gulf state's governors estimate they could see an increase of 100,000 to 125,000 more jobs almost immediately. That is a big carrot in this jobs scarce environment and I believe the Interior Department is moving in that direction.
Unfortunately Global does not have any LEAPS. The longest strike we can buy is March 2012. However, that is enough time to see a profitable play. The stock is currently $4.57 and we could see it back in the $6-$7 range by March. Resistance is $5.50 but I think we will get through that level. The energy sector is constantly recommended as THE sector to invest in given the current unstable economics.
I am going to recommend we buy the March $5 call, currently 80-cents and sell the March $5 put, currently $1.10. That gives us a small net credit to enter the trade and seven months to break over that $5.50 resistance. The worst case would be owning the stock at $5 in March if we did not close the position earlier.
Buy GLBL March $5 Call, currently 80-cents, no stop, no target.
Sell Short GLBL March $5 Put, currently $1.10, no stop, no target.
New Aggressive Recommendations
Existing Play Recommendations
Links to original play recommendation
COG - Cabot Oil & Gas (Short Put)
VIX - Volatility Index (Naked Call)
BAC - Bank of America (Long Term)
BAC - Bank of America (Update 8/31)
DRC - Dresser Rand (Long Term)
WLT - Walter Energy (Long Term)
BZH - Beazer Homes (Long Term)
MDR - McDermott International (Long Term)
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.