It is Sunday night and the S&P futures are not down double digits. That is a refreshing change.
Obviously there is a lot of darkness before the dawn so anything can change. However, I think the lack of a sell off, even on the confusing headlines coming out of Greece, is a positive event. Also, Asia traded lower on Monday so there was plenty of reason for the U.S. futures to drop. Have we seen the end of the profit taking?
Greece is struggling to form a new government but they really don't have any other choice. It will eventually happen or they won't get the bailout money. Italy is in danger of losing their prime minister to a no confidence vote and also be forced to form a new government. That would be a little bigger challenge but also one that does not have a crisis deadline attached.
If we can succeed in trading higher on Monday it would be bullish because it would mean investors have considered all these factors and decided to buy anyway.
Hedgefunds were down about -8% for the year going into October. Some may have recovered but most were still net short going into October. That suggests there could be a race to get long if the markets show any positive spark. That means a move higher on the S&P over 1250 and a breakout over 1275 would seal the deal.
S&P targets for year-end are rising with 1350-1375 the minimum levels and targets as high as 1475 have been mentioned. I could easily see 1375 but moving over that level could be a challenge. There is still too much confusion over the economy and the global environment.
For this week I am going to add a couple plays in the energy sector. Crude oil is trying to break above $95 and there are some factors in the Middle East to support this move. Iran will be in the news a lot next week and the potential for harsher sanctions that could include a stronger lockdown on their oil sales. If their oil is removed from the market the price could be over $115 very quickly. That is probably one reason why governments will not take that action because of the impact on their own economies. However, the risk is still there and the IAEA will release a critical report on Iran this week.
Energy has been a strong sector for earnings and the majority are behind us so we don't have those mine fields to cross.
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Current Position Changes
New Short Put Recommendations
New Covered Call Recommendations
New Long Term Recommendations
New Aggressive Recommendations
COG - Cabot Oil & Gas (Short Put)
Cabot rallied +15% last week on better than expected earnings and production growth for 2012 is expected to grow by 50% or more. This company is hitting on all cylinders and when investors come back into the market for a year-end rally with oil at $95 this is one of the sector leaders that will be a fan favorite. It broke out to a new high on Friday and with oil prices testing $95 on Sunday night it should continue to run. However, if the market corrects the profit taking will hit the strong stocks as well as the weak ones.
I am recommending a relatively close strike at $72.50 given the recent volatility and the stock at $83.70. $10 is not a very big cushion on an $80 stock and a +20% move in one week. Be aware this stock can move quickly there is why there is a big premium.
Sell short Dec $72.50 Put, currently $2.35, stop $76.50
Chart of COG
OXY - Occidental Petroleum (Short Put)
Occidental is one of the strongest stocks in the energy sector. They are primarily land based. They have leases with "tens of billions of barrels" potential and they are cheap to drill. They claim "they don't find oil, they only produce it." They specialize in buying older producing fields and then using new technology to rework them and produce the remaining oil. The strategy means they have proven fields with proven geology. Most of these fields never had any comprehensive seismic done when they were initially drilled so there are major deposits that were overlooked. On one field in California they found an entirely new deposit that had never been drilled and it is estimated to have 10 billion barrels of oil. The only hangup to producing it is the slow permit process in California. Permits slowed to a crawl in 2011 with only 17 permits issued for the entire state out of more than 100 requests. The governor fired the department heads last week for unstated reasons but it suggests there is about to be a breakthrough. Drilling this oil will produce billions in jobs and revenue for California.
Occidental also had blowout earnings and is pressing a new three month high. I think it will hit $110 before year-end. I am recommending an $87.50 put but personally I would go even more aggressive to $90 or $95 to capture more premium because once over $100 I think the stock won't be back.
Sell short Dec $87.50 put, currently $2.41, stop loss $89.75
Chart of OXY
These are not official recommendations but I considered them attractive opportunities. If you are looking for more positions you might consider these.
BHP $79.00 Dec $70.00 Premium $1.97
DRQ $68.50 Dec $60.00 Premium $1.50
FLS $99.86 Dec $85.00 Premium $1.65
Existing Play Recommendations
Links to original play recommendation
BAC - Bank of America (Long Term)
BAC - Bank of America (Update 8/31)
BZH - Beazer Homes (Long Term)
MDR - McDermott International (Long Term)
BK - Bank of New York Mellon (Long Term)
SD - Sandridge Energy (CC + Long Term Combo)
YHOO - Yahoo (Long Term Combo)
PHM - Pulte Homes (LT Leveraged Combo)
XOP - Oil Exploration SPDR (Short Put)
UWM - UWM ETF (Covered Call)
JJC - Copper ETF (Covered Call)
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.