Option Investor

Systematic Portfolio Creation

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Sorry for the delay in the December positions. I have been doing a lot of research to develop what I think is a well thought out and diversified portfolio. Since there is still a lot of volatility out there, I think we should continue to adopt the same strategy we used last month. Therefore, we should enter into the positions in stages so as to limit the risks from going all in on every position. Option premiums are high enough right now to sell a little here and there. If you use less than $15,000 for selling options, your initial position may be your full allocation. While we are getting a little more transparency on the degree to difficulty the economy is in each day, there are still a lot of unknowns. However, there are a lot of opportunities out there to buy stocks at discount prices. In my opinion, the sectors that are most appealing are the health care facilities, generic drugs, commodities and consumer staples. Therefore, the December portfolio will have names like McDonalds (MCD), Teva Pharmaceuticals (TEVA), United States Oil Fund (USO) and SPDR Gold Tracks (GLD). I think there is still too much risk to continue trying to find value in financial stocks. But if you are a spread trader you may want to look at stocks like GOOG and CME.

As I mentioned in last night's Market Wrap, I like the long oil play as a way to play the weakening dollar. So far, the highest correlation that I have found to the barrel is the United States Oil Fund (USO). You could trade the DIG position, but the problem with it is that it trades according to the Oil & Gas Sector rather than with the commodity. Maybe we can do both positions as a form of a horse race and follow the differences throughtout the month. As the chart below shows, the ETF is at $41.65, down $2.50 on the day. Crude is down about $3.00 to $51.50. Both are down about 5.75% on the day. Since I think that the target low for Crude Oil is at about $45 per barrel, that translates to a $37 price target on USO. We are selling the December 36 Put (UBO XJ) for about $1.35 per contract. Our full allocation on a hypothetical $20,000 account is three contracts. The initial margin requirement on one put is $360. Let's sell two of the three now. As I discussed somewhat last month, the test of the minimum account size proved that one could have established all of the positions with $6,000 initial capital. Let me know if you would like me to establish the positions from the minimum perspective rather than a hypothetical allocation. The low is at $39.14 but I am setting the risk management is at a break below $38.

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