They never had a chance. Ratings agencies going negative on Europe again and Intel warning on Q4 was a double tap that crushed the futures before the open.
I was afraid reality would strike back against that Friday short squeeze once the real impact of the EU announcement was understood. As I said before it was just a plan to make a new plan and while long on good hopes it was short on details.
Moody's and Fitch joined with S&P to warn about ratings reviews for European countries, banks and a weak outlook for European economics. With all three agencies lining up with potential downgrades the outlook for bond yields in Europe soared. The cost of selling and carrying debt is going higher, possibly much higher.
In reality nothing changed in Europe. Ask anyone last week they would have told you the ratings were going to change. It is just the confirmation of trouble ahead that spooked the market.
Intel added to the gloom after they warned revenue could be a billion dollars below prior estimates because the severe hard drive shortage. Western Digital now estimates there could be a shortage of 60 million hard drives in the current quarter. The shortage is also expected to carry over into Q1 and some expect it to last into Q2 because drive component factories were also flooded.
The Intel warning suggests we could see another flurry of warnings and downgrades for the PC makers as well. That could weigh on the tech sector until spring. Fortunately most PC makers already had their products in the channel for the holiday period. Their challenge will be to sell products in Q1 once they use up all their available hard drive inventory. Western Digital (WDC) was the hardest hit with the Seagate factories spared. However Seagate can't get components because the component factories were flooded. That means they are only slightly better off with no damage but still very few drives being produced.
How does that impact our markets for the rest of the week? The Intel news will blow over. The European ratings news will continue to be a cloud until the agencies actually take some action and we know how badly it will impact the countries involved. I don't expect any actual downgrades in December. I think they will wait until Q1 and have the benefit of further information and details about the fiscal pact. That is just my opinion.
The majority of the market losses came at the open with the Dow down -243 points. Support appeared at 11,950 on the Dow and held all day. Nasdaq 2600 support also held. The S&P dipped just below 1230 before firming and rising in the afternoon.
There were plenty of opportunities to sell off hard and it did not happen. The spike right at the close was a buy program in a thin market. Only 6.2 billion shares traded. That is low volume for a big news day.
The Fed meets on Tuesday and no changes are expected. However, today's implosion could push them over the edge to do something to head off further contagion from Europe. That would be a very slim chance but it does exist.
I am going to run the same two plays again for tomorrow. However, I changed the strike on the DSW play to capitalize on the slight dip in the stock price. I also added one more covered call on Hi-Tech Pharma.
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Current Position Changes
New Short Put Recommendations
KOG - Kodiak Oil & Gas (Short Put)
Kodiak is a small oil and gas producer in the shale exploration sector. It recently acquired some additional acreage and producing wells. It is a strong takeover target with a market cap of only $2 billion. This is pocket change to any potential acquirer. The company has a good track record and strong chart.
I am recommending we sell the January $10 put with the stock right at $9. The premium is $1.45 and only a small gain in the stock puts us out of the money. An alternate play would be to sell the $10 covered call for about the same risk/reward.
Do not enter this position unless the S&P and KOG are positive before 10:AM.
Sell KOG Jan $10 Put, currently $1.45, stop loss $8.45
Chart of KOG
New Covered Call Recommendations
DSW - DSW Inc (Covered Call)
DSW operates 327 shoe stores in 40 states. After a hiccup in mid November the chart is showing a steady gain and we are in the retail season. Option premiums are decent for DSW and although resistance is $50 I believe DSW will trade over that level.
I am recommending we sell the Jan $48 covered call for $2.30 with the stock at $48.01. With the high call premium we have some downside protection to just below $46.
Do not enter this position unless the S&P and DSW are positive before 10:AM.
Buy-Write DSW Jan $48 Covered Call, currently $48.01/$2.30, stop loss $46.45
Chart of DSW
HITK - Hi-Tech Pharma (Covered Call)
Hi-Tech Pharmacal Co is a specialty pharmaceutical company making generic and OTC drugs and nutritional products. The stock doubled since March and saw a very strong growth spurt since August. Earnings on Dec 3rd rose +32% but that was not enough to overcome the gains in the stock and traders dumped it to move on to something else.
After a week of declines the chart has begun to turn positive again with a positive close today in a bad market. I am going to recommend the $40 call for about a $2.70 gain if we are called in January.
Do not enter this position unless the S&P and HITK are positive before 10:AM.
Buy-Write HITK Jan $40 Covered Call, currently $38.80/$1.50, stop loss $36.75
Chart of HITK
New Long Term Recommendations
New Aggressive Recommendations
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)
GMCR - Green Mountain (Short Put)
MMR - McMoran (Covered Call)
GMCR - Green Mountain (Covered Call)
JEF - Jefferies (LT Leveraged Combo)
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.