After a week of strong gains I am going to try to sneak in a few plays before the October options expiration.
I have to really hold my nose to buy (sell short) something at these levels but the market is showing no signs of a retreat. With earnings picking up steam with several high profile reports this week I am hoping there is still enough bullishness to get us to Friday without a roll over.
Normally after a week of 4-5% market gains you would normally wait for a pullback but after a week of waiting I think the denial rally is still in full swing. I know I am still in denial so I assume there are others in the same position as me in having to chase the market.
Oil is holding over $70 and after spending all day Sunday at the Peak Oil conference I am hoping it makes another attempt at $75 this week. Quite a few analysts are still bullish on oil and I have not heard anything yet at the conference to make me think differently. I will have a report on what I learn later in the week.
Until we get a decent pullback I am going to be really careful and carry only a few positions. I hope everyone understands my reluctance to go full steam into the market at this time.
NO OPEN POSITIONS
ATPG - ATP Oil & Gas $19.18
ATP Oil & Gas Corporation is engaged in the acquisition, development and production of oil and natural gas properties in the Gulf of Mexico and the United Kingdom and Dutch Sectors of the the North Sea. At December 31, 2008, the Company owned leasehold and other interests in 77 offshore blocks, 41 platforms and 129 wells, including 22 subsea wells, in the Gulf of Mexico. It operates 111 (86%) of these wells, including all of the subsea wells, and 78% of offshore platforms.
ATP just rallied slightly over the late September resistance and appears ready to make another run at the September high of $23. Earnings are not until early November.
Sell to open November $22.50 Put HKU-WX currently $4.10, IF ATPG TRADES AT $19.50. Stop loss ATPG @ $18.50
Chart of ATPG
HES - Hess Corp $57.44
Hess Corporation (Hess) is a global integrated energy company that operates in two segments: Exploration and Production (E&P) and Marketing and Refining (M&R). The E&P segment explores for, develops, produces, purchases, transports and sells crude oil and natural gas. These exploration and production activities take place principally in Algeria, Australia, Azerbaijan, Brazil, Denmark, Egypt, Equatorial Guinea, Gabon, Ghana, Indonesia, Libya, Malaysia, Norway, Russia, Thailand, the United Kingdom and the United States. The M&R segment manufactures, purchases, transports, trades and markets refined petroleum products, natural gas and electricity.
Hess closed at a new 4-month high on Friday with a breakout over resistance at $57. Earnings are Oct 28th so we will be out before then.
Sell to open November $60.00 Put IGG-WL currently $4.70, IF HES TRADES AT $57.75. Stop loss HES @ $56.50
Chart of HES
FWLT - Foster Wheeler $31.75
Foster Wheeler AG, formerly Foster Wheeler Limited, operates through two business groups: Global Engineering and Construction Group (Global E&C Group) and Global Power Group. The Global E&C Group, which operates worldwide, designs, engineers and constructs onshore and offshore upstream oil and gas processing facilities, natural gas liquefaction facilities and receiving terminals, gas-to-liquids facilities, oil refining, chemical and petrochemical, pharmaceutical and biotechnology facilities and related infrastructure, including power generation and distribution facilities, and gasification facilities. The Global Power Group designs, manufactures and erects steam generating and auxiliary equipment for electric power generating stations and industrial facilities worldwide.
FWLT rebounded off the early October lows but has not really sprinted ahead like most of the market. The drag was a big contract loss by Fluor (FLR) that soured sentiment. FWLT is doing fine and I am hoping funds will buy FWLT as a value play with everything else in the market already overbought. Earnings are Nov-4th.
Sell to open November $35.00 Put UQI-WG currently $4.30, IF FWLT TRADES AT $32.55. Stop loss FWLT @ $31.40
Chart of FWLT
PH - Parker Hannifin $52.86
Parker-Hannifin Corporation (Parker) is a full-line diversified manufacturer of motion and control technologies and systems, including fluid power systems, electromechanical controls and related components. In addition to motion and control products, the Company also is a producer of fluid purification, fluid and fuel control, process instrumentation, air conditioning, refrigeration, electromagnetic shielding and thermal management products and systems. The Companyâ€™s manufacturing, service, distribution and administrative facilities are located in 40 states and in 47 foreign countries. Its motion and control technologies and systems are used in the products of its three business segments: Industrial; Aerospace; and Climate & Industrial Controls.
Resistance at $53 and $56. Decent rebound from early October dip suggests it could test $56 again before earnings. PH dropped to $52 in afterhours on Friday on no news. Earnings are Oct-20th so we want to be out by next Monday.
Sell to open November $55.00 Put PH-WK currently $3.90, IF PH TRADES AT $53.00. Stop loss PH @ $52.25
Chart of PH
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)