Despite a strong gap open this morning the strong resistance at S&P 1350 continues to exert a hold on the market.

The S&P rallied for +9 points and spent a lot of time north of 1350 but in the end that level is still strong resistance. The minor close over at 1351 is just noise. The Nasdaq Composite and Nasdaq 100 were the only indexes to manage a close at a new high and both thanks to Apple and Priceline. Apple gained +9 points to $502 and Priceline gained +26 points to $571. It was hardly a broad market rally.

Volume was lousy at 5.9 billion shares and new highs across all markets were only 341. That is down from the 500-600s we saw last week. The Nasdaq broke out to a new high but only 103 Nasdaq stocks were at new highs. That extremely narrow breadth is telling when we saw 256 new highs on Feb 3rd.

I am concerned about the lack of conviction we are seeing in the market. If it were not for the opening short squeeze the gains would have been limited. The S&P gapped open to 1352 and closed at 1351. There was no follow through buying.

After the bell today Moody's downgraded the debt ratings on Italy, Spain, Portugal, Slovenia, Slovakia and Malta and placed negative outlooks on France, Britain and Austria because of fallout from the euro zone debt crisis.

Moody's said Europe's weakening economic prospects threaten the implementation of domestic austerity programs and the structural reforms that are needed to promote competitiveness. Moody's also questioned whether the euro zone had adequate resources to be pulled together to deal with the crisis. They said market confidence would remain fragile with a high potential for further shocks to funding conditions for stressed sovereigns and banks.

In the ratings, Italy was cut one notch to A3 from A2; Spain two notches to A3 from A1, and Portugal one step to Ba3 from Ba2. Slovakia and Slovenia both went down one step to A2, while Malta moved one step to A3. Austria, France and Britain all remained with the top AAA rating but were put on negative outlooks, a warning that if conditions worsen they could be hit with full downgrades.

Earlier in the Day Fitch and S&P downgraded Spanish banks.

Despite the apparent progress on the Greek bailout there are still a lot of problems in Europe. How long the market is going to be willing to ignore these challenges is unknown.

Futures are down tonight after the Moody's downgrades but they are only down -2 points suggesting there may be another day of market meltup in our future but it is tough to tell. The market is very extended and failing at resistance. It is tough finding potential candidates for short puts in this environment. Volatility is low at 19 on the VIX and that means put premiums are skinny on inexpensive stocks. Higher dollar stocks have higher premiums but also more risk.

I spent a couple hours looking at hundreds of charts and I could not find anything I was willing to bet our money on tonight. Sometimes the conditions just don't line up for a low risk trade and when that happens we need to stand aside and watch. Maybe conditions will improve tomorrow. Cash is a position.

Jim Brown

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Current Portfolio

Current positions

Current positions

Current Position Changes

CRR - Carbo Ceramics (Short Put)

When we entered the Carbo Ceramics play we added a long put just in case Carbo had not finished declining. We used a February put because if was cheap. The theory being if the play was not headed in our direction by Feb expiration then we exit both sides and find another play.

We have four days left for that decision process. I am not exiting the play today but I am warning that we are probably going to exit later this week. There is minimal time premium on the long put but I am targeting Wednesday to exit if nothing changes.

WFC - Wells Fargo (Short Put Combo)

The $30 insurance put on WFC expires this Friday. With WFC hovering just over $30 we may need to wait until the last minute to take action on that position. If WFC moves over $31 we can just let it expire and replace it with a stop. If WFC declines to $30 or lower we will need to close the position or at least restructure it.

Be aware are change in this play will probably be made on Wednesday.

YHOO - Yahoo (Short Put Combo)

We are currently holding a short Apr $14 put on Yahoo. We entered at $2.29 and the put is 0.24 today. I am recommending we close the short put on Tuesday and capture that profit. We still have a long April $14 call and the put proceeds will reduce our cost in that call to roughly 60 cents with Yahoo at $16.12 today. There is no use in leaving the near worthless put open because we never know what Yahoo may do.

Close Short YHOO Apr $14 Put, currently 24-cents. Entry $2.29, gain +2.05.

Chart of YHOO

New Short Put Recommendations


New Covered Call Recommendations


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 (Long Term CC)

YHOO - Yahoo (Long Term Combo)

PHM - Pulte Homes (LT Leveraged Combo)

JEF - Jefferies (LT Leveraged Combo)

GLD - Gold ETF (Short Put)

WFC - Wells Fargo (Combination)

CRR - Carbo Ceramics (Short Put)

JJC - Copper ETF (Short Put)

WNR - Western Refining (Covered Call)

EXXI - Energy XXI (LT Covered Call)

RIG - Transocean Offshore (Short Put Spread)

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.