After a nasty Monday morning dip the bulls came roaring back and the bullishness was much stronger than the ending numbers represented.
The Presidents speech went off without a hitch and it turned into more of a victory lap than a list of new regulations for Wall Street. There was some huffing and puffing but the hallowed halls are still standing.
The China trade war brewing also added some volatility into the market but before the day was over everybody was trying to take back the weekend's harsh words.
Some of the stocks I was following literally exploded after the obligatory morning dip. I was shocked by stocks like FLS, NOV and FTI. The bulls bought the dip and bought it in volume. This could be end of quarter window dressing as well as triple witching expiration pressures.
Most of the stocks I had on my personal watch list for plays were up too strongly for a recommendation tonight but I did find three that I feel are relatively safe. Futures are flat at 2:AM and China's market is moving higher.
First Solar was downgraded to a SELL on Monday and that crippled the solar sector. With STP down two consecutive days now and FSLR under pressure I want to close STP at the open on Tuesday. We are still positive on STP and I want to exit before it turns into a loss.
Hartford (HIG) set a new 10-month high on Monday and barely even hiccupped at the open. We are up over $2 on the Sept $25 Put and HIG closed at $25.74. The option was bid/ask at .50x.55. Let's see if we can exit this position on Tuesday at 40-cents. I am afraid lightning could strike and I would rather not lose our profit while we try to squeeze another 15-20 cents out before expiration. Pigs get fat, hogs get slaughtered.
Saint Mary (SM) also closed at a new 10-month high at $30.09. We are short the Sept $30 Put. If SM can turn in one more decent day I think we can exit that position for 50-cents. If you can get a fill at 50-cents I would take it and close the position for a $2.50 profit.
The three plays I am recommending tonight are all energy related. Crude is down slightly at $68.75 at 2:30 this morning. If it falls under $68.50 don't enter these plays until it is back over $68.90.
MDR - McDermott Intl $28.75
McDermott International, Inc. (MII) is an engineering and construction company with specialty manufacturing and service capabilities. MII provides a variety of products and services to customers in the energy and power industries, including utilities and other power generators, and national oil companies, and the United States Government.
McDemott has resistance at $35 but is showing a steady upward trend. There was a pop last week on an upgrade. The last four ratings changes have been upgrades to BUY. MDR declined slightly on Monday and that may be our entry point.
Sell to open October $32.00 Put MDR-VZ currently $5.30, stop MDR @ $25.75
Chart of MDR
FSYS - Fuel Systems Solutions $38.87
Fuel Systems Solutions, Inc. (Fuel Systems) designs, manufactures and supplies alternative fuel components and systems for use in the transportation, industrial and power generation industries on a global basis.
This stock is very strong and barely dipped after a two week run. It did dip and I am hoping it found support at $36 and is ready to test very strong resistance at $40. If it does manage to break over $40 there would be very strong short covering. If it stops at $40 we can still make a couple bucks.
Sell to open October $45 Put JQQ-VI currently $8.40, stop FSYS @ $35.75
Chart of FSYS
WLT - Walter Energy $61.86
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..
We played Walter a couple weeks ago and were stopped out on the dip to $50. Now it is $62. Hindsight is always 20:20. Resistance is $63 and I am betting we are going to see a breakout towards the end of the month. This is one of those momentum stocks that people love to ride into quarter end.
Sell to open October $65 Put WLT-VM currently $6.40, stop WLT @ $59.25
Chart of WLT
We do not sell out of the money puts for a few cents and then hope the market does not correct and cost us a fortune to exit. I don't like to risk a dollar to make a quarter.
The concept for Option Writer is to find solid momentum plays with enough volatility to inflate the option premiums. We will sell in the money naked puts ahead of the stock price and let the stock rally to our strike.
Selling in the money puts allows us to capture nearly dollar for dollar the movement in the stock price.
Because we are selling in the money that same dollar for dollar move can go against us as well. For this reason we establish tight stops to take us out of the play for a loss of a few cents rather than let the losers grow and "hope" they rally again. In a typical month we could get stopped out of twice as many plays as we close for a profit but those stops will be minimal and the winners worth the trouble.
If you do not have the ability to sell options you can turn the plays into spreads by buying a lower strike put. This will decrease your margin requirements but it will also decrease your profits.
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)