EOT Position Update – August 10, 2011

August 10, 2011

Market Snapshot

Let’s sum up the last week of market action in a single word…

Panic!

Simply put, there was no place to hide from the stock market selloff this week. Investors didn’t discriminate with their selling.  Nothing mattered… Not Fundamentals… Not Technicals… It was sell first and ask questions later.

As a result, the Dow Jones Industrial average lost more than 10% over the last week. It was a volatile week that included two days that the Dow was down more than 500 points in a single trading session.  That’s just crazy…

What happened to spark such a wild week?

It all started months ago with weaker than expected economic data.  As I’ve previously pointed out, the global economy is in a business cycle slowdown.  Economic growth stopped accelerating and now it has begun to slow.

As the evidence mounted, investors began to fear the global economy would slip back into a recession.

Then, with the market already reeling, sovereign debt worries in Europe and a downgrade of US debt delivered the knockout blow.

Simply put, this is a crisis of confidence.

Investors don’t believe the US government is capable of dealing with their budget problems.  More importantly, the lack of leadership from our elected leaders breeds uncertainty.  And investors hate uncertainty…

What does it all mean for you?

Obviously, stocks have broken out of the trading range that dominated the market action this year.  Now the markets are in correction mode as everyone reassesses the situation.

It’s great news for our put options and bad news for our call options.

It also means implied volatility is high.  And when implied volatility is high, options are more expensive to buy.  That means selecting the right option is crucial to our success.  In short, we don’t want to overpay for options when volatility is high.

The way I look at it, this crisis is creating some very exciting opportunities.  In fact, I’m working on a new trade for later this week.  So keep an eye on your email…

Let’s move onto the updates…

Position Updates

Just a quick note:  Remember, we won’t update every open position every week.  I try to focus on the positions that have some significant news or price movement.

  SQM January 2012 $70 Calls
SQM couldn’t avoid the market selloff this week.  This is clearly a case of the baby being thrown out with bath water.  Just look at the price of grains this week.  Corn, wheat, and soybeans prices hardly moved.  And as long as agricultural commodity prices remain high, farmers will continue to buy more fertilizer products.  It’s really that simple… Unfortunately, SQM closed below both of our support levels.  And that’s our cue to sell this option.

  BK January 2012 $27 Calls
BK fell through support at $24 and $23.  It’s not surprising considering the circumstances.  All financial stocks got creamed this week… Go ahead and cut your losses on this option if you haven’t already done so.

  APKT August 2011 $60 Puts
APKT got crushed this week.  Look, overvalued growth stocks should get crushed in a market correction.  And APKT didn’t disappoint… The massive selloff sent shares of APKT through our $50 support zone on Monday.  Our put option hit a peak gain of 335%!  Congratulations to everyone cashing in on this huge winner!

  STEC November 2011 $17 Puts
STEC continued to get beat up by the market this week.  Our option hit a peak gain of 261%!  Congratulations to everyone on a successful trade.

Category: EOT Update