The Larry Summers celebration rally probably won't last ahead of the FOMC decision.
Investors who were long over the weekend were rewarded with another short squeeze on Monday that pushed the indexes close to their recent highs. Considering the FOMC could upset the market balance on Wednesday I am not surprised to see the early morning gains sell off into the close.
The market was celebrating the end of the military threat for Syria and the end of the Larry Summers threat as chairman of the Fed. He reportedly sent the president a letter requesting that his name be withdrawn from consideration because of the acrimonious nature of the debate around his potential nomination. Summers has wanted the Fed job for more than a decade and he just ended his relationship with Citigroup on Friday to pursue the nomination. The abruptness of the withdrawal letter so soon after the Citigroup exit suggests the president called and requested it in order to give the appearance of a Summers exit rather than a presidential surrender to the massive protest wave against the potential nomination.
Regardless of the reason the twin threats have ended and the market produced a satisfactory short squeeze on low volume.
The rest of the week could be volatile. The FOMC on Wednesday is expected to cut QE by $10 billion and revise their economic outlook lower. It will be an interesting series of events and you can bet Bernanke will be the super dove in his press conference in order to avoid a hit to the equity markets.
What you did not see in the major indexes today was the hundreds of stocks that sold off hard in the afternoon. The 30 stocks in the Dow managed to keep the gain in triple digits but the broader equity market was much weaker. The S&P gained +9 points but crashed into the 1,700 level to come to a dead stop. The Russell 2000 only gained +2 points after being up +12 earlier in the day. The Nasdaq lost ground thanks to Apple and several other large tech stocks. Overall it was not as bullish under the hood as it appeared in the Dow.
I looked at more than 400 stocks today in trying to find something relatively safe with a decent premium. Those qualities were not found today. They either had high premiums and the stocks were diving or very low premiums on stocks that managed to produce a decent chart. I was only able to find two stocks I was willing to recommend out of the 400+ I researched.
We have a lot of covered calls going off the board next Friday. Assuming the market does not crater most should finish in the money and be called.
There is no need to force plays just to have something to do. We have had a good run the last several months so be patient and limit your positions.
Send Jim an email
Long Term Positions - None
Current Position Changes
JCP - JC Penny (close)
JC Penny is back in the news again with another director and major shareholder bailing out of their position. After moving up to $14.50 the stock is on the decline again. We have a September $13 put with the stock at $13.64 but with the news coming daily I don't want to wait for it to expire on Friday. Close the position at the open on Tuesday.
Buy to close JCP Sept $13 Put, entry .62, currently .06, +.56 gain
QIHU - Qihoo (close)
Qihoo got some bad news on Monday when a competitor sold a stake in their search business to another competitor. Qihoo had been rumored as the winner in the stake sales but Tencent Holdings got the win. This may be only a temporary setback for QIHU but it has declined -$12 in the last three days. We are currently profitable in this position so I am electing to close it rather than wait until the smoke clears and the eventual winner is determined.
Buy to close QIHU Oct $75 Put, entry $4.81, currently $2.45, +2.36 gain.
WLT - Walter Energy (close)
Walter broke through resistance at $15 last week and was looking strong. Unfortunately it went from hero to zero with a collapse back below that prior resistance. Several brokers came out against the coal sector last week and nipped the rally in the bud. This was an aggressive position with the put strike at the money on the assumption the rally would continue. It did not continue. Close the position.
Buy to close WLT Oct $16 Put, entry $1.46, currently $2.90, -1.44 loss.
New Short Put Recommendations
HLF - Herbalife
We are going back to the well on Herbalife. We have played it many times and mostly with profitable results. The stock is in an uptrend as more hedge funds pile on the Ackman short. The latest major investor is William Stiritz, CEO of Post Holdings (POST), who became the fourth largest shareholder in the company at 5.2%. Carl Icahn still has a 16% stake and the list of bulls is growing longer. Ackman is hurting with a -3.6% loss in Q2 for his fund.
Sell short, HLF Oct $65 put, currently $2.37, stop loss $67.25
New Covered Call Recommendations
RAX - Rackspace Hosting
Rackspace has made a monster move over the last two weeks of +$8 to stop right at resistance at $52. They host servers for 200,000 corporations all over the country. With the need for more and more data those customers are being forced to constantly add to their space.
The company is going to present at the Goldman Sachs Communacopia Conference on Sept 25th. I expect the presentation to be positive for the stock price and push it over that $52 resistance.
This is an expensive stock for covered calls but I think the risk/reward is worth it.
Buy-write RAX Oct $52.50 call, currently $52.26, $2.20, stop loss $49.00
New Aggressive Recommendations
New Long Term Recommendations
Existing Play Recommendations
Links to original play recommendation
PHM - Pulte Homes (Covered Call)
PHM - Pulte Homes (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)
CSIQ - Canadian Solar (Covered Call)
JASO - JA Solar (Covered Call)
QIHU - Qihoo (Short Put)
GMCR - Green Mountain Coffee (Covered Call)
TSLA - Tesla Motors (Covered Call)
JCP - JC Penny (Short Put)
WLT - Walter Energy (Short Put)
CZR - Caesar Ent (Covered Call)
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.