The price of oil is back over $75 but the majority of oil stocks lost ground on Tuesday.
The morning dip was just deep enough to hit the stops on all three positions. The Monday rally was all but forgotten as stocks weakened again before the close but Intel's great earnings on Tuesday night have assured a positive bounce at Wednesday's open. This will produce short covering and odds are good we will see Dow 10,000. Once that number is reached there could be a sell the news event. After all everyone knew that Intel was going to beat but they are not that sure about Google on Thursday.
The ATPG position was stopped out with a trade at $19.45 and a loss of 20-cents. The low of $19.16 was only 29-cents below out stop.
The HES position was stopped out with a trade at $57.25 and a profit of 3-cents. The HES ow was only 8-cents below our stop.
The PH position was stopped out with a trade at $52.25 and a loss of 60-cents. PH dropped nearly a buck intraday.
For short term positions I try to put the stop below the prior day's low to take us out of the play for a minimal loss if the stock heads south. The only really dangerous period is the first two days. If we can avoid having a strong upward strike reverse over the first couple of days then we should be ok for the rest of the play. We did not succeed in that on Tuesday.
For two days now the markets have tested overhead resistance and closed flat to negative for the day. There is definitely a struggle in progress between the bulls and bears.
This is option expiration week and there are a lot of critical earnings reports on Thursday. I looked at about 50 charts tonight and there is a lot of weakness on the individual stocks.
I will be back from the Peak Oil conference on Wednesday and will write again after we see what Wednesday brings.
I am going to change the entry on FWLT to open the position at the open on Wednesday. It has declined to support at $31 and we know it should gap open with the markets.
No Open Positions
FWLT - Foster Wheeler $31.30
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 tested support at $31 on Tuesday. With the market poised to open higher I want to enter the position at the open on Wednesday and use a tight stop. Earnings are Nov-4th.
Sell to open November $35.00 Put UQI-WG currently $4.30, Stop loss FWLT @ $30.75
Chart of FWLT
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)