Everyone claimed the good earnings news was already priced in but it appears everyone was wrong.

The Dow rallied on the Intel and JPM news to move over 10,000 for the 26th time since 1999. The official close was 10015 but that is not the critical point. The worry tonight is whether GS, C, GOOG, HOG, IBM and NOK and keep the ride alive when they report on Thursday. There is a contingent of analysts that believe the market makers pushed the Dow over 10K at the close in hopes of attracting the last group of holdouts back into the market in time for a sell the news decline on Friday.

I am unsure what the future holds but we have to pretend to be bullish if the Dow can hold over 10K through Friday. Current uptrend resistance is about 10050-10075 and the Dow has rallied about 610 points since the Oct 2nd low. This is extremely overbought on a short-term basis. The earnings may be good but this is still October. I am still leery of a potential portfolio restructuring event by fund managers before their October 31st year end.

The FWLT position was entered at the open this morning and the close at $32.54 was a three week closing high. Hopefully if the markets can remain bullish for at least one more day we can get some short covering on FWLT as it breaks over that $32.50 resistance. The stop loss was raised to $31.50.

I hate that we got stopped on the HES, ATPG and PH positions yesterday but I am determined to keep the stops close on the first day of a new position to avoid a repeat of the Walter trade in late September. I would rather have a couple extra stops for small losses than a couple big ones for major losses.

I would love to get a market pullback on Friday to give us an opening for new positions on Monday.

Jim Brown



Current Portfolio




New Recommendations


FLR - Fluor $49.39

Fluor Corporation (Fluor) is a holding company that, through its subsidiaries, provides engineering, procurement and construction management (EPCM) and project management services. Fluor serves a number of industries worldwide, including oil and gas, chemical and petrochemicals, transportation, mining and metals, power, life sciences and manufacturing. Fluor is also a primary service provider to the United States Federal Government. It performs operations and maintenance activities for major industrial clients, and also operates and maintains their equipment fleet.

Fluor is similar to FWLT in business only a lot bigger. If the U.S. economy and the world is actually recovering from the recession then Fluor's business should be rebounding. Fluor took a major hit since mid September and seems to have found support at $48. I would like to see a breakout over resistance at $50 before entering the play or another test of support at $48. Earnings are Nov-9th.

Sell to open November $55.00 Put FLR-WK currently $6.20 ONLY if FLR trades at $50.50 or $48.50. Above $50 would be a breakout and a return to $48 a retest of support.

Stop loss FLR @ $49.00 if the $50.50 trigger is hit first. Stop loss is $47.50 if the $48.50 trigger is hit first.

Chart of FLR


Recommendation History



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Methodology

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.


Margin Requirements:

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)