The Dollar is imploding overnight, gold hit $1130 and the S&P futures are up +7.50. I have a serious case of Déjà vu.

Eventually this alternating days of weak dollar, strong dollar has got to quit. However after rebounding from the 15 month low of 74.81 the dollar rebounded to 75.67 in only 48 hours. Now roughly 24 hours in trading time it has dipped below 75 again. This is whipping the equity markets into a froth. Trying to trade equities recently is worse than herding cats. Gap up, gap down, reverse, repeat. Tough to produce a trading plan that lasts for more than 30 min.

However, despite my frustration at the lack of a trend I am going to try a couple more entries on Monday. The S&P appears poised to test 1100 again and eventually I believe it could break out. The risk is that a continued failure to break that resistance will eventually lead to a correction as traders get tired of not moving forward and pull back to see where real support appears.

Be patient and a real tradable trend will eventually develop.

Jim Brown



Current Portfolio



NO OPEN POSITIONS


New Recommendations


SWI $19.88 - SolarWinds

SolarWinds, Inc. is a provider of enterprise-class network management software designed by network professionals for network professionals. The Company’s offerings include enterprise-class network management products, entry-level network monitoring products and a range of software tools for network professionals.

SWI is poised to break over resistance at $20 and could run back to the prior high at $24 if we could get a breakout in the markets. The bid/ask spread is 30 cents so there is a little transaction risk if there is an immediate reversal. However, if we get the breakout over $20 we should be able to raise our stop to a minimum of a breakeven and improve from there.

Sell to Open Dec $25.00 Put SWI-XE currently $5.10, Stop loss SWI @ $18.75

SWI Chart

BYD $9.49 - Boyd Gaming

Boyd Gaming Corporation is a multi-jurisdictional gaming company. As of December 31, 2008, the Company wholly owned and operated 15 casino entertainment facilities located in Nevada, Mississippi, Illinois, Louisiana and Indiana. In addition, it owns and operates a pari-mutuel jai alai facility located in Dania Beach, Florida, two travel agencies, and an insurance company that underwrites travel-related insurance. As of December 31, 2008, the Company owned an aggregate of approximately 808,200 square feet of casino space, containing approximately 22,250 slot machines, 450 table games and 7,250 hotel rooms. Its new hotel at Blue Chip Casino, Hotel & Spa opened on January 22, 2009. This expansion added a 22-story hotel, which includes 300 guest rooms, a spa and fitness center, additional meeting and event space, as well as new dining and nightlife venues.

This is a quick trade using expiring November options. Boyd is recovering from the beating it took in late October and should be back over $10 by Friday, market permitting. If we can pickup a buck for five days I will take it. It is also cheaper than playing WYNN or LVS.

Sell to Open Nov $10.00 Put BYD-XB currently $1.00, Stop loss BYD @ $9.00

BYD Chart

BRCM $28.89 - Broadcom

Broadcom Corporation (Broadcom) is a provider of semiconductors for wired and wireless communications. Broadcom provides a portfolio of system-on-a-chip (SoC) and software solutions to manufacturers of computing and networking equipment, digital entertainment and broadband access products, and mobile devices. Its product portfolio includes solutions for digital cable, satellite and Internet potocol (IP) set-top boxes and media servers; high definition television (HDTV); digital versatile discs (DVD) players and personal video recording (PVR) devices; cable and digital subscriber lines (DSL) modems and residential gateways; transmission and switching for local, metropolitan, wide area and storage networking; server solutions; broadband network and security processors; cellular communications; global positioning system (GPS) applications; mobile multimedia and applications processors; mobile power management, and voice over Internet protocol (VoIP) gateway and telephony systems..

This is another quick trade using expiring November options. Broadcom is also recovering from the beating it took in late October and appears close to breaking over resistance at $29. This is a bet that Broadcom closes the week closer to $31 than $28.

Sell to Open Nov $30.00 Put RBF-WF currently $1.20, Stop loss BRCM @ $28.25

BRCM Chart


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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)