We are six days into August and the market has not crashed. Definitely no complaints.
Monday was another lackluster day but the market closed well off its lows with only the Nasdaq and Russell 2000 ending in the green. I don't know how long this will last but I am not going to complain. We are long overdue for a correction but the economic fundamentals are actually improving rather than slowing.
The danger is that too much improvement in the economics will have the Fed starting to talk the market down with QE taper talk. While I know the Fed does not want the market to decline they also don't want to leave QE in place for an hour longer than they have to.
The earnings cycle is fading and the majority of companies beat lowered estimates. Apparently that was good enough for the market.
Today's decline was courtesy of Dallas Fed president Richard Fisher and his comments about the need for urgency in ending QE. He is a noted hawk but his comments still weakened the market.
There are no material economic reports for the rest of the week so the market will be left to worry about earnings from the companies bringing up the rear of the parade and headlines from overseas.
Futures are down -4 tonight after Asian markets declined on Fisher's comments.
I am still expecting a weak market in August. The rate of climb has slowed and that suggests the market is tiring.
Send Jim an email
Current Position Changes
CRR - Carbo Ceramics (Closed)
We had a Sept $65 short put on CRR and the stock exploded higher after earnings. With the put premium at 30 cents there was nothing material to be gained by leaving the position open. It was closed at the open on Tuesday.
Closed CRR Sept $65 put, entry $3.50, exit .25, +3.25 gain.
New Short Put Recommendations
HLF - Herbalife
The battle of the titans continues. First it was Bill Ackman against Herbalife with a $1 billion short. Carl Icahn saw an opportunity to cause Ackman pain and joined the battle on the side of Herbalife. The stock rallied and the news headlines slowed. Recently at a meeting of hedge fund managers George Soros disclosed he had taken a position in Herbalife and it was his third largest holding. He recommended other fund managers take a look at the company.
Last week Herbalife reported earnings and the 18th consecutive quarterly beat over estimates. Sales rose +18% and earnings increased +28% to $1.41 per share. They also raised guidance for the full year to between $4.83-$4.95 per share.
Shares rallied on the flurry of headlines to close at $66.66 today. That represents a PE of 14 times trailing earnings and 13 times 2013 estimates. Herbalife also pays a 2% dividend.
It appears Ackman is on the wrong side. He claims he still believes the company will crumble and he has not covered any of his short. He went so far this week as to file a complaint with the SEC alleging insider trading by Soros in disclosing his position and telling other hedge funds to buy. Harvey Pitt, former SEC Chairman, said that would be a loser. There is nothing wrong with stating your positions and recommending others copy you.
That means Ackman is going farther in the hole as each day passes. With every dollar gained the other hedge funds are smelling blood in the water and they will be adding to positions in anticipation of Ackman being forced to cover his losing position.
For us this provides a stock with a lot of implied support and high option premiums. We have played Herbalife several times in the past thanks to the high premiums.
In addition to the short term play here I am recommending it as a long term play using the November options.
Sell to open Sept $60 Put, currently $2.73, stop $62.50
YY - YY Inc (Short Put)
YY is a Facebook clone operating in China. The reported earnings on Friday that rose +118% to 35 cents and best estimates of 14 cents. In Q3 the company guided for a +90% growth in revenue. The number of paying customers rose +170% on the music platform. Revenue from online games and music jumped 152% in Q2.
They are scheduled to bring popular TV shows to the YY platform that allows mutual friends to view together and comment in real time.
This company has exploding growth and the stock chart shows it. There is good support at $40 and I am recommending a Sept $40 put.
Sell to open YY Sept $40 Put, currently $2.70, stop loss $39.25.
New Covered Call Recommendations
New Aggressive Recommendations
SCTY - Solar City (Short Put)
This play is in the high risk category because they report earnings on Wednesday. Business is absolutely booming for SCTY but there is always the risk of an unexpected event. Solar City buys solar panels and installs them on lease at customer locations. The customer gets a lower electric bill and Solar City gets credit for the power that is transferred back into the grid.
In Q1 operating least revenue increased +85% to $15.1 million compared to an 8% increase in the year ago quarter. Gross profits rose +25% but because they buy the panels up front and put them on lease there is a front loaded expense. They will not make a profit for sometime but they are building a huge annuity of revenue in the form of an ever increasing portfolio of solar installations. They currently have over 57,400 customer installations on lease.
Wal-Mart signed a deal to put panels on 60 stores in California and expects to have 130 stores installed by the end of 2013. SCTY announced a deal on July 23rd to supply 12.5 megawatts of solar power for 7,500 military homes in the Island Palm Communities on the island of Oahu.
Tesla founder Elon Musk is the Chairman of Solar City. That alone should blunt any hiccup in the earnings. More than 17% of the stock is sold short.
I am going to recommend an Oct $40 put. If something negative comes out of earnings and the stock drops we will sell covered calls on it until we get back to a profit. I believe the company has a good future and it closed at a two month high on Monday. I am recommending the October put to capture more premium just in case of a disaster so we have a bigger cushion. The stock will either gap up or down on earnings so a stop loss would have no value.
Sell to open SCTY Oct $40 Put, currently $3.60
New Long Term Recommendations
HLF - Herbalife (November Put)
I recommended a shorter term September put above. This is a longer play using the November options and a lower strike. We get a higher premium with less risk but we have to hold it longer.
Sell to open NOV $57.50 Put, currently $4.30, stop $59.75
Existing Play Recommendations
Links to original play recommendation
PHM - Pulte Homes (Covered Call)
PHM - Pulte Homes (CC Update)
GMCR - Green Mountain Coffee (Covered Call)
GMCR - Green Mountain Coffee (CC Update)
SLW - Silver Wheaton (Covered Call)
SLW - Silver Wheaton (CC Update)
BZH - Beazer Homes (Covered Call)
JASO - JA Solar (Covered Call)
LGF - Lions Gate Films (Covered Call)
LGF - Lions Gate (CC Update)
BBRY - BlackBerry (Covered Call)
CRR - Carbo Ceramics (Short Put)
TSLA - Tesla Motors (Covered Call)
FSLR - First Solar (Short Put)
GMCR - Green Mountain (Short Put)
CSIQ - Canadian Solar (Covered Call)
JASO - JA Solar (Covered Call)
QIHU - Qihoo (Short Put)
TSLA - Tesla Motors (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.