EOT Position Update – November 9, 2011
November 9, 2011
Market Snapshot
Here we go again…
Turmoil in Europe is throwing the global financial system for a loop.
Just as we finally put the Greek debt problem to bed, another European sovereign debt crisis rears its ugly head. This time around it’s Italy.
I know it’s hard to believe, but the situation in Italy is actually worse than the one in Greece!
There’s a real possibility Italy could go bankrupt. And if they do, there’s no way to contain the financial chaos from a debt default of this magnitude.
This isn’t like the previous bailouts of Greece, Portugal, and Ireland. Italy has $2.6 trillion of debt. Their debt dwarfs that of the European bailouts so far.
Simply put, Italy is too big to bail out.
If Italy goes bankrupt, it’s a repeat of the 2008 financial crisis… or even worse.
The budding crisis has already claimed the job of Italian Prime Minister Silvio Berlusconi. Now it’s up to the Italian parliament to approve strict austerity measures.
Not surprisingly, Italian debt yields are spiking. Stock markets around the world are falling off a cliff. And the VIX, a measure of market volatility, is up more than 30% today.
The turmoil has prompted Barclay’s Bank to issue a note saying Italy “may be beyond the point of no return”. That’s never good…
Clearly, Europe’s sovereign debt crisis is a long way from being solved.
Where do the markets go from here?
At this point, stocks are likely to continue moving lower. The S&P 500 will almost assuredly test the near term support zone around 1,220. And we’ll most likely see the S&P press lower toward support of the 50-day moving average around 1,200.
If those key technical support zones fail… watch out. We could see the S&P all the way back down at the October lows.
I’m on the hunt for a new trade right now. So keep an eye out for a new trade coming your way later this week.
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.
PEGA December 2011 $40 Calls
PEGA delivered disappointing third quarter revenue and earnings today. The stock’s down big in after hours trading as I write. Management’s trying to spin the earnings miss in a positive light. And they’re not out of line… their business is growing and they expect revenue to top $500 million in 2012. However, management’s optimism for the future isn’t enough to keep the stock from sinking now. Go ahead and sell these call options to conserve capital.
CNH December 2011 $40 Calls
CNH continued its impressive climb. The stock broke through our resistance around the 200-day moving average yesterday. Congratulations to everyone locking in some massive gains on this trade. Our options reached a peak gain of 205%! More aggressive traders should tread lightly. The market is skating on thin ice. Stocks had a massive rally in October without any real catalyst. And with Italian debt problems popping up, we could see stocks give back all those gains in a hurry. The next resistance is at $42.20.
SBUX January 2012 $38 Calls
SBUX delivered a solid quarter. They reported strong earnings to go along with better than expected revenue growth last week. As expected, the stock jumped out to a new all-time high of $44.70 on the news. Our call options topped out at a peak gain of 165%. That’s what we were counting on and SBUX didn’t disappoint. Congratulations to everyone on a successful trade!
Category: EOT Update
