The market volatility is increasing as dip buying strength fades.

The Dow did recover from a -90 point drop on Monday to end positive but it was due entirely to the strength in the Nasdaq. IBM and Boeing were still dragging the Dow down but tech stocks led by Apple helped to improve sentiment as the day progressed.

Caterpillar posted earnings that seemed to please the street even though they lowered guidance. In a contradiction of terms the CAT CEO said he was the most confident he has been over the last two years. Basically he said conditions are soft but may be bottoming around the world. CAT shares rallied +2.28 and helped to offset the -2.17 decline in IBM.

As we near month end we could see continued upward pressure but it appears the intensity is fading. The closer we get to the "sell in May" cycle the more cautious investors may become.

Earnings are also a challenge with the ratio of guidance warnings to guidance upgrades running 14:1 and well over the 2:1 average. The outlook is not good and this is going to translate into a weak market over the summer.

Economics, earnings, Europe, China and the sequester are all going to weigh on the markets in May. Supporting equities will be the continued QE program. One side will win and one side will lose. I suspect the initial lower will be the markets as fund managers take profits ahead of the summer doldrums.

However, the expected correction has got to be one of the most expected market events in history. Whenever everyone expects a specific move out of the market the opposite seems to happen.

S&P futures have been down as much as 5 points tonight. They have improved somewhat but still negative at -3.

I am going to try and launch a couple plays on Tuesday but be aware the market is getting nervous and the bad news bulls driving the market higher over the wall of worry may be developing indigestion.

Jim Brown

Send Jim an email

Current Portfolio

Current positions

Current Position Changes

BSFT - Broadsoft (Covered Call)

The Broadsoft covered call position was stopped out on April 17th. The $30 call was sold for $1.40 and was trading at 50 cents when the stop loss was hit. The stock has found support at the $24 level and I want to relaunch a May $25 covered call to replace the one we lost. If you closed both the stock and option position you can reenter the position today at the same price.

Stopped: Short BSFT May $30 Call, entry $1.40, exit 50 cents, +0.90 gain

Sell BSFT May $25 covered call, currently $1.50, no stop

BSFT chart

MNST - Monster Beverage (Add stop loss)

Monster has stalled at $56 ahead of earnings on May 8th. Rather than risk a slow bleed as April winds to a close I am adding a stop loss at $54.50. This is just below the Friday low. We may get stopped out on a bit of market volatility but at least it will be with a profit.

Position: Short May $52.50 put, entry $2.35, currently $1.35, add stop at 54.50

Monster Chart

New Short Put Recommendations

PCYC - Pharmacyclics Inc (Short Put)

PCYC has consolidated in the $74-$80 range for the last month. It broke out on Monday to $82 and could be starting a new leg higher. The breakout news was the completion of enrollment on a new leukemia study. The drug stocks have been hot recently and PCYC lagged. I believe that consolidation is over.

Earnings are not until May 16th.

Because of recent market volatility do not enter this position unless PCYC and the S&P are both positive by 10:AM.

Sell short MAY $75 Put, currently $2.15, initial stop $76.50.

PCYC Chart

New Covered Call Recommendations

SLW - Silver Wheaton (Covered Call)

Silver Wheaton is what they call a silver streamer. SLW enters into agreements with miners to give them money to build and operate the mines. In return SLW signs a contract to buy the silver produced in the mine for an average cost of about $4 an ounce forever.

Basically they would structure a deal with XYZ miner to give them $20 million up front to buy equipment, build infrastructure, dig the mine, etc. The mine is primarily for some other mineral and silver is a byproduct. More than 70% of mined silver is produced as a byproduct of a base metal mine. The mine life could be 20-30 years. As part of the deal SLW gets all the silver produced for the life of the mine at $4 an ounce.

It is a good deal for the mine because they get the money up front without having to encumber assets or use up their bank line of credit. It is a good deal for SLW because they have a locked in source of supply for the life of the mine at $4 an ounce.

SLW has contracts with more than 23 mines around the world with millions of ounces in future silver delivery allocated to SLW. In 2013 alone they will receive about 33.5 million ounces of silver and 145,000 ounces of gold. By 2017 that will grow to 53 million ounces of silver and 180,000 ounces of gold.

SLW pays out 20% of the previous quarter's cash flow in the form of a quarterly dividend.

SLW has decent option prices and I am planning on keeping SLW in the portfolio as a permanent covered call. If we are called one month we will just reenter the trade and do it again. We should be able to get about $1.25 to $1.50 a month in premium. Depending on how the strikes fall and the direction of silver prices we could get over $2 in some months.

The crash in commodities last week should have given us a support floor in SLW around $22 but there is risk to $18 if commodities continue to decline.

Buy-Write SLW May $23 Covered Call, currently $22.89 & $1.17, no stop.

SLW Chart

New Long Term Recommendations


New Aggressive Recommendations


Existing Play Recommendations

Links to original play recommendation

RIG - Transocean (Covered Call)

BSFT - Broadsoft (Covered Call)

GMCR - Green Mountain (Covered Call)

MNST - Monster Beverage (Short Put)

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.