9:05am (EST)
Special Note: We wanted to provide another update on the current market events and some of our open trades. Some of you have asked about stops and why certain trades remain open although they are below their stop targets.
First, let’s start with the market.
Folks, the words of President Obama have caused some serious technical damage to the market and the three day sell-off we got last week wrecked a few trades that were on track for decent profits. Nearly all of our trades were positive and started off strong before the news broke that Obama was going after the banks.
If Obama had waited another week-and-a-half we would have been golden and probably would have established some good put positions already. However, we got caught with a few more call options than put options which hurt. This is why we try to only keep 6 or 7 trades open at one time.
We felt uneasy making a lot of put recommendations although we talked about some companies outside the Members Area that we thought were good short candidates. This is also why we went further out with the call options because we knew a correction was in the cards.
As far as stop targets…
For options that trade under 75 cents we do not carry one. These are cheap out-of-the-money plays that can be calls or puts. The main reason we don’t carry a stop is because of the volatility. EMC is a perfect example of this and we hope we get a strong rebound today. The trade is down 55% but we should get back to even and then some hopefully.
For options that trade over $1.00 we normally carry a 50% stop loss but we have a couple of situations that we want to explain. Berkshire was the first chance investors had the opportunity to buy this stock in the double-digits after the 50-for-1 split and we thought there would be mo re demand. OSI Systems has been a flat out dud but we thought it would provide some protection in a down market as well.
Other than that there isn’t much to say. We have mentioned that the market would be hard to trade once we reached a peak but that doesn’t stop us from being aggressive. We are option traders and it’s in our bones.
We have given a few trades a little more time than normal and if we hadn’t we would have missed the slide in RIMM. We spend an enormous amount of time researching and digesting the market and long-time readers know we have a good bead on things most of the time.
Each trade is different but until the market establishes a firm trend (which appears to be lower) then we will have to be even more selective. We still expect a bounce and we are penciling in Thursday and Friday as the days the bulls make a big run but even that is unclear as the bears gain momentum.
Berkshire Hathaway Class B (BRK/B, $68.84, down $1.26)
February 74 calls (BVQBX, $0.55, down $0.20)
Entry Price: $1.50 (1/21/10)
Exit Target: $3.00
Return: -63%
Stop Target: None
Action: We are trying to get through the week with this one and shares are up this morning in pre-market trading.
EMC (EMC, $16.94, up $0.18)
April 19 calls (EMCDS, $0.25, up $0.04)
Entry Price: $0.55 (1/19/10)
Exit Target: $1.00+
Return: -55%
Stop Target: None
Action: We will have to watch this one closely although the calls do not expire until April. We would love to get a run to $20 by the end of the week.
Shuffle Master (SHFL, $8.76, down $0.27)
May 10 calls (SFQEB, $0.50, down $0.20)
Entry Price: $0.85 (1/19/10)
Exit Target: $1.70+
Return: -41%
Stop Target: 40 cents
Action: This position has 4 months before expiration and it is an option that is over 75 cents and under $1.00. We are on the fence on what to do with this one because we think Shuffle Master will certainly be over $10 by then. We will have to see how this one trades over the next few days…
OSI Systems (OSIS, $27.89, up $0.12)
February 35 calls (UOJBG, $0.20, flat)
Entry Price: $1.40 (1/11/10)
Exit Target: $2.80
Return: -86%
Stop Target: None
Action: Continue to hold.
Vivus (VVUS, $8.68, down $0.23)
March 10 calls (QJSCB, $0.50, down $0.15)
Entry Price: $1.35 (1/7/10)
Exit Target: $2.70
Return: -63%
Stop Target: 65 cents
Action: The stock fall below $8.75 so we may be closing this one today.
Research In Motion (RIMM, $61.41, down $0.27)
Feb 60 puts (RFYNL, $1.75, down $0.10)
Entry Price: $1.50 (1/6/10)
Exit Target: $2.25
Return: 17%
Stop Target: 75 cents
Action: We mentioned yesterday that shares broke below its 50-day moving average of $63.50 on Friday. This should now serve as a major resistance level and we think the downtrend is still intact. Shares are flat as we head towards the opening bell. If the selling pressure continues today then there is as good chance we see this stock dip below $60.
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