For the first round of additions for the September expiration cycle I am adding some extra plays.
The market decline on Friday coupled with the $3 drop in oil prices finally inflated option premiums to the point where it has become worthwhile to take some risks. I am going to add some conservative plays and some speculative plays. The list is longer than usual and readers should pick their favorites rather than play them all.
This is going to be a critical couple of weeks in the market. Overhead resistance is strong but the bulls don't seem to want to give up. Volume on the down days has been light and the dips continue to be bought. Eventually that dip buying will fail and we will see a real correction. If it happens this week then we will take some losses. If we can get past next week's expiration cycle then we should be able to set our stops to take us out for a breakeven or better when the correction comes. Once past August expiration the premium will fade quickly from the September options and allow us to set better stops.
The LDK Solar position opened at 40-cents the morning after I suggested we close it. The following morning LDK gapped down -$2 so the timing of the exit worked out well.
The August expiration is next Friday. This is the preferred week to enter new positions while option premiums for September are still inflated. Once September becomes the current month these same premiums will decline by 50% or so in the first week, assuming the market does not roll over.
New Recommendations - Conservative
MEE - Massey Energy $29.60
Massey Energy Company (Massey) produces, processes and sells bituminous coal of steam and metallurgical grades, primarily of a low sulfur content, through its 23 processing and shipping centers, called Resource Groups, many of which receive coal from multiple coal mines.
Coal companies have been upgraded in recent weeks despite the cap and trade proposals to be discussed in the fall. The majority of our electricity comes from coal. The same is true with the majority of the developing nations including China.
Sell September $27 Put MEE-UT currently $1.20
(An alternate play could be selling the $32 put and buying the $27 put for a net credit of $2.30)
Chart of Massey
BTU - Peabody Energy $36.34
Peabody owns majority interests in 30 coal mining operations located in the United States and Australia. In addition, it owns a minority interest in one Venezuelan operating mine through a joint venture arrangement.
Peabody is the largest coal company in the U.S. and also supplies a lot of coal to China from the mines in Australia. Profits are increasing and prices are rising.
Sell September $35 Put BTU-UG currently $1.55
Chart of Peabody
BUCY - Bucyrus $32.47
Bucyrus International, Inc. designs, manufactures mining equipment for the extraction of coal, copper, oil sands, iron ore and other minerals in mining centers throughout the world.
In order to mine coal to power an economic recovery you need to buy equipment and that is where BUCY makes its money.
Sell September $30 Put HBU-UF currently $1.25
Chart of Bucyrus
AA - Alcoa $13.27
Alcoa Inc. (Alcoa) is engaged in the production and management of primary aluminum, fabricated aluminum, and alumina combined. It's products are used worldwide in aircraft, automobiles, commercial transportation, packaging, building and construction, oil and gas, defense, and industrial applications. Alcoa is a global company operating in 35 countries.
The potential for the resurgence of the global economy means Alcoa is going to ship more aluminum. The chart has taken off and broken out over resistance at 12.50. If there is more news about a slowing rebound overseas Alcoa could get hit. Maintain your stops.
Sell September $15 Put AA-UC currently $2.01
Buy September $12 Put AA-UM currently .37 for net credit of $1.64
Chart of Alcoa
BEXP - Brigham Exploration $7.40
Brigham Exploration Company is an independent exploration, development and production company that uses three-dimensional (3D) seismic imaging, drilling and completion technologies to explore for and develop domestic onshore oil and natural gas reserves.
BEXP is very active in the Bakken Shale and has been recently upgraded.
Sell September $7.50 Put QBJ-UU currently .80
Chart of Brigham Exploration
NOV - National Oilwell $36.46
National Oilwell Varco, Inc. (NOV) is a provider of equipment and components used in oil and gas drilling and production operations, oilfield services, and supply chain integration services to the upstream oil and gas industry.
NOV is a premier supplier to the oilfield and continued deep water drilling as well as the accelerated efforts in the Bakken Shale should keep NOV profits rolling.
Sell September $35 Put NON-UG currently $1.35
Chart of National Oilwell Varco
ATVI - Activision Blizzard $12.69
Activision Blizzard is a combination of Activision and Vivendi in 2008. Activision has the most popular multi player game on the Internet, World of Warcraft, with 12 million active monthly subscribers and a rabid following.
Sell September $14 Put AQV-UN currently $1.45
Buy September $12 Put AQV-UL currently .40
Chart of Activision
New Recommendation - Speculative
EMN - Eastman Chemical $54.08
Eastman Chemical Company (Eastman) is a global chemical company, which manufactures and sells a portfolio of chemicals, plastics, and fibers. Eastman has 11 manufacturing sites in seven countries that supply chemicals, plastics, and fibers products to customers throughout the world.
Eastman is on a roll although it has decent resistance at $60.
Sell September $60 Put EMN-UL currently $6.70
Buy September $50 Put EMN-UJ currently $1.25
Chart of Eastman Chemical
HIG - Hartford Group $19.49
The Hartford Financial Services Group, Inc. (The Hartford) is an insurance and financial services company. It provides investment products, individual life, group life and group disability insurance products, and property and casualty insurance products in the United States.
Strong earnings and a revised outlook garnered HIG some upgrades over the last month. There was a strong demand for a $900 million stock offering earlier in August. Plenty of room to run.
Sell September $25 Put HIG-UE currently $5.80
Buy September $17 Put HIG-UW currently .95
Chart of Hartford
CLR - Continental Resources $36.00
Continental Resources, Inc. is an independent oil and natural gas exploration and production company with operations in the Rocky Mountain, Mid-Continent and Gulf Coast regions of the United States. The Company focuses on exploration activities in new or developing plays that provide it the opportunity to acquire undeveloped acreage positions for future drilling operations.
Continental is now the largest landholder in the Bakken Shale with 525,000 acres. The recently proved the existence of a fourth pay zone in the Bakken, which makes their leases even more valuable.
Sell September $45 Put CLR-UI currently $9.30
Buy September $35 Put CLR-UG currently $2.35
Chart of Continental
WLT - Walter Energy $54.50
Walter Energy, Inc. (Walter Energy), formerly Walter Industries, Inc., is a producer and exporter of premium United States metallurgical coal for the global steel industry. The Company also produces steam coal and industrial coal, metallurgical coke and coal bed methane gas.
Walter broke out back in July and refuses to slow. I am hoping the rally continues.
Sell September $65 Put WLT-UM currently $11.10
Buy September $50 Put WLT-UJ currently $2.10
Chart of Walter Energy
COF - Capital One $32.00 Sell Sept $30 Put COF-UF
BAC - Bank America $16.00 Sell Sept $15 Put BYO-UO
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)