The volatility arrived as expected with a triple digit loss on the Dow at the open but the loss was quickly erased by positive economics.
How do you play a triple digit gap lower and a sudden reversal of fortunes back to a gain? Obviously if you "knew" what was going to happen we could sell a boatload of puts at the open and be happy campers by the close. Unfortunately we never know in advance how the day will play out.
The rebound to 13,027 on the Dow and 1371 on the S&P had all the appearances of the start of a new leg higher. Unfortunately those gains did not hold either and the Dow ended up back at 12,984 and a loss of -1 point. A 145 point range for the day and a nearly dead even finish. The S&P closed at 1367 for only a +1.85 point gain and a 18 point range.
So where does that leave us for tomorrow? Volume remained low at 6.2 billion shares and decliners were 17:15 over advancers. The lack of conviction is readily apparent. I am encouraged by the quick rebound on every dip but the market is still being sold on every peek over 13,000.
If I had to pick a side I would favor a continued move higher. The buying force on the dip was significantly stronger than the amount of selling at the highs.
Crude prices backed off about $2 to $108 in some much needed profit taking. Since I expect crude prices to rise again before the weekend I am going to add a couple more plays in the energy sector. It is about the only sector that has a strong story for support at mid quarter. Tech stocks don't generally do well late in Q1. Banks had good day thanks to comments from Warren Buffet that they were in the best shape in years. We already have some banks and they have not been able to maintain a trend for the last two months.
Transocean (RIG) was a hero today. The company posted earnings that included $1 billion in "contingent liabilities" for the Macondo well disaster. By specifying a number well below the $3-$5 billion estimates of some analysts it suggested Transocean had a general idea how the settlement would play out. The liability trial that was supposed to start today was postponed for a week because the parties involved told the court they were making progress towards a settlement. Transocean rallied nearly $3 on the news.
I am still cautious about the market until it posts a decent close well over 13,000 on the Dow. That is only a psychological number rather than a real resistance level but it is doing a very good job of restricting the gains.
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Current Position Changes
New Short Put Recommendations
MMR - McMoran (Short Put)
McMoran Exploration is drilling ultradeep wells in the Gulf in shallow water of less than 100 feet. The wells are targeting depths of more than 30,000 feet. They have made some major discoveries and their first ultradeep well to go into production will be the Davy Jones 1. It was supposed to begin production in Q4 but there were some delays. Now it is expected to be flow tested in Q1 but the scuttlebutt is that we could have any announcement almost any day now. If it flows as expected we could see MMR spike significantly. Obviously if it does not perform as expected there could be a decline in the stock since some expectations are already priced into the stock.
To hedge some of the risk I am going to recommend we sell the April $15 put, currently $1.93 and buy a March $13 put currently 39-cents. The nearly $2 premium on the $15 put along with the insurance of the $13 put would protect us against a catastrophic decline.
Sell Short MMR Apr $15 put, currently $1.93, no stop
Buy Long MMR Mar $13 Put, currently $0.39, no stop.
Chart of MMR
BNO - US Brent Oil Fund (Short Put)
Crude prices are very likely to remain high for the rest of the summer. Analysts are predicting WTI to go to $120 and Brent to $140. The BNO is the U.S. Brent Oil ETF. As the Iranian oil embargo and potential attack by Israel moves farther into the summer months the price of Brent should rise. We saw a decent bout of profit taking on Monday from the $87.60 level. ($125.50 Brent futures)
There may be some additional profit taking ahead, which would be beneficial for us and allow a better entry so I am going to qualify the position.
Do NOT enter this position unless the S&P and BNO are positive at the open.
Sell short April $84 Put, currently $2.30, no initial stop.
Chart of BNO
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)
USO - US Oil Fund (Covered Call)
UGA - US Gasoline ETF (Short Put)
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.