The major indexes are less than 1% away from a 10% correction with many of the sub indexes already well over -20%.
In theory we should be due a bounce very soon. The Dow has posted losses on 12 of the last 13 trading days. You have to go back to October 1974 to find a losing streak worse than that.
Unfortunately we know from experience that oversold or overbought can last far longer than conventional wisdom would suggest. Anyone that has ever held a losing position while thinking it has to turn around soon certainly understands what I mean.
This is a trading newsletter but short puts in a falling market is not the wisest move a trader can make. It would work out great if you could pick the bottom on exactly the right day but nobody has successfully figured out how to do that consistently.
I looked at more than 400 stock charts this weekend in hopes of finding something to play. My thought process was to look for the least bad charts on the theory those would be the stocks to rebound when the market turned positive. It was a very frustrating search. Almost 100% looked like the Akamai chart below. Would you want to sell a put in front of that decline? I will pass on that opportunity.
In the end I elected to only add one play that was so severely oversold that further downside risk appeared minimal. Clearly appearances can be deceiving but the storm clouds are clearing on this stock.
We will be put on the Transocean short put we entered in March. The market crash and the drop in oil prices knocked a significant amount off the stock in just the last week alone. I have high hopes for Transocean as a long term hold and that made me willing to allow the position to be put to us. We can continue to write covered calls against it and I believe it will eventually end up being very profitable.
I am also pleased with the Herbalife trade even though it was sold hard on Thursday after the +$9 spike after the Einhorn speech. It closed positive on Friday when most of the market was severely negative. If the market tries to move higher next week I would expect HLF to be strongly positive.
I also believe Starbucks will rally if the market turns positive.
Until the market does pick a direction other than down we will maintain a minimal play list.
Cash is a position.
Send Jim an email
Current Position Changes
RIG - Transocean Offshore (Short put)
In March we entered a combination play on Transocean with a short May $62.50 put and a long April $55 put as protection. The April long put was closed at expiration with a +2.33 gain. The May short put will be exercised at $62.50.
Our cost in RIG after adjusting for the gain on call and premium received on the put will be $54.52. I am going to recommend a covered call on RIG to further reduce our cost.
Transocean is in the midst of a boom in offshore drilling. Over the last month alone they wrote or received lease extensions for $762 million in new revenue. All were for significantly improved day rates. The energy sector has been crushed over the last two months and the market crash over the last three weeks was especially hard on energy. $90 oil is not cheap oil and OPEC is not going to let it go much below $90 without cutting production.
Multiple analysts have predicted a deepwater rig shortage in 2013 of as much as 20%. Development drilling on new discoveries is being pushed out 2-3 years because of the lack of rig availability. The limitations today are in the recertification by a third party of each rig before it can begin a new contract. This is a new government regulation that came after the Horizon disaster. Rigs are required to have stronger blow out preventers and all shipboard systems must be tested and certified by third parties. The order backlog for new and stronger blow out preventers is 12-18 months. As soon as rigs come off existing contracts they are rushed to shipyards for the installation of new equipment and certification and then they are put back out on new contracts. Transocean has achieved certification on 31 of its 63 active floaters including 19 of its 27 ultra-deepwater rigs.
Transocean has been penalized by the delay in the Deepwater Horizon liability trial. The judge has reset the trial date against BP and the partners for January 13th. Transocean has claimed all along that is has no liability in the disaster and even if it did BP agreed to indemnify RIG for any and all liability. The court has affirmed that indemnification three times since the case began. Transocean refuses to settle with BP ahead of the trial because they believe it will be proven they have no liability.
Once this problem is resolved Transocean should eventually move significantly higher to well over $60. This is why I viewed the risk as acceptable on the short put.
Long April $55 Put, cost $1.32, exit $3.65, +2.33
Short May $62.50 Put, entry $5.65, put to us.
RIG Stock @ $62.50 -7.98 = $54.52.
Sell RIG Nov $50.00 Covered Call, currently $2.75, stop loss $47.75
Chart of RIG
SBUX - Starbucks (Change Stop)
Starbucks rolled over with the market last week and our protective put is now well in the money. I am lowering the stop once again to prevent giving back our gains. We could see a continued drop if the market remains weak. Starbucks has material support at $48.
Change stop on Long June $55 Put to $53.25
Chart of SBUX
HLF - Herbalife (Short Put)
That was fun! Einhorn did not mention Herbalife in his Wednesday speech and HLF shares rocked higher from the open at $43 to $49.90. On Thursday they spiked to $52.47 at the open before collapsing in the negative market. Caris & Company upgraded HLF to a buy and raised their price target from $39 to $86.
I believe the potential for an immediate post Einhorn spike was so widely known that quite a few traders were poised to buy it at the speech. When they were rewarded with a nearly $9 point gain in a very negative market they immediately closed those positions.
HLF actually held its ground in Friday's market and closed fractionally positive. Fortunately for us the put premiums had not declined when the spike to $49.50 triggered our entry into the play. Now that the Einhorn crisis is over they have started to fade and even though the stock is -$5 below our entry point the put premium is lower now than at our entry.
Now we have the question of what to do about a stop or a protective put. If the market were to rebound I believe HLF would be strongly positive given their rising earnings, dividend and seriously oversold condition. However, if the market continues lower we could see all ships sink as the tide flows out.
Since we received a huge premium for that November put we have plenty of room to buy a protective put to protect us against further downside. We sold a $55 put for $15.80 and the stock closed Friday at $45. The implied intrinsic premium is $10 so even if the stock remained perfectly flat we would end up with nearly a $6 gain. Without any new attacks by Einhorn I expect it to rebound back over $60 in a positive market.
I am going to recommend we buy a June $42.50 put as insurance against a further decline. I am only going to recommend buying the put if HLF trades at $43.25. That is below the Wednesday pre speech low and the Friday low. If HLF does not trade down then we save our money.
Note: Because HLF shares did not hit the $49.50 entry point until after the Einhorn speech there was no need to buy the May put insurance that was discussed in the prior recommendation. That was insurance against entering the play before Einhorn spoke.
Buy HLF June $42.50 Put, currently $2.55 ONLY if HLF trades at $43.25.
Chart of HLF
New Short Put Recommendations
NUS - NuSkin Enterprises (Short Put)
NuSkin began declining three days before Herbalife after posting record earnings for Q1. The company beat on revenue and earnings but it has been a tough market and without blowout earnings most companies have seen similar post earnings declines.
There are eight analysts that cover NuSkin and all eight have a buy rating with an average price target of $60. There are no holds or sells.
NuSkin is a multi-level like Herbalife. When the Einhorn comments on HLF hit the wires NuSkin imploded just like Herbalife. The decline slowed the prior week as traders waited for the Einhorn speech. When Barron's wrote a negative article on multi-levels on Sunday the 13th both HLF and NUS dipped again last Monday.
Both stocks rallied on Wednesday when Einhorn ignored them and both fell on Thursday in a seriously negative market. NuSkin was fractionally positive on Friday.
I believe NuSkin will rally strongly if the broader market is positive. There are no pending events or aggressive short sellers attacking either stock today. I think we can take advantage of the panic decline to add another decent position in NuSkin.
Do NOT enter this play unless the S&P and NUS are positive.
Sell NUS Sept $40 Put, currently $4.10, stop $38.50.
New Covered Call Recommendations
Long Term Recommendations
New Aggressive Recommendations
Existing Play Recommendations
Links to original play recommendation
GLD - Gold ETF (Short Put)
EXXI - Energy XXI (LT Covered Call)
RIG - Transocean (Short Put Spread)
SBUX - Starbucks (Short Put Spread)
XHB - Homebuilders ETF (Short Put)
HLF - Herbalife (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.