I am going to add a couple plays for Wednesday but we are playing Russian roulette here. Futures were up +3.50 when I started this article but have suddenly fallen back to zero.

I wanted to take advantage of the Dow closing on support and the Nasdaq and Russell showing stronger relative strength. The Dow is either going to rebound at the open or break support and begin a big move down. I was voting on the rebound from support until about 15 min ago. I am still going to list the new plays but we are not going to enter them unless the markets are positive.

You are supposed to buy when nobody else is afraid. I am not quite that brave but I do believe we should take chances at clear support levels. The Dow closed at one of those levels on Tuesday at 10280.

I took advantage of the down day to look for stocks that were positive or only minimally weak and had decent remaining premiums for December. With expiration only 7 trading days away these will be short-term positions.

In order to enter these positions I want the Dow to be above 10300. That gets us above the two afternoon resistance points and hopefully in a move higher. If the Dow opens down we want to enter the positions if it rebounds to trade over 10300 whether it is 11:AM or 2:PM.

If you have not taken advantage of the Option Investor End of Year Renewal Special here is the link to the offer. This is the cheapest rate we offer for the entire year. Nobody can get the core newsletters at a better rate. Click here for the 2009 Renewal Special Details

Jim Brown



Current Portfolio




New Recommendations


AKAM - Akamai Technologies $25.10

Akamai Technologies, Inc. (Akamai) provides services for accelerating and improving the delivery of content and applications over the Internet, from live and on-demand streaming videos to conventional content on Websites, to tools that help people transact business.

Akamai has been getting some good press of late and rebounded sharply from the Tuesday market drop. I am picking a put just under Tuesday's low and hopefully the rebound will continue.

Sell Short Dec $24 Put UMU-XZ currently $.30, stop loss AKAM @ $24.40
Don't enter this position unless the Dow is above 10300.

Chart of AKAM

MOS - Mosaic $59.23

The Mosaic Company (Mosaic) is a producer and marketer of concentrated phosphate and potash crop nutrients for the global agriculture industry. The Company operates through business segments: Phosphates, Potash and Offshore. The Phosphates Segment produces phosphate crop nutrients and feed phosphate, which are used in crop nutrients and animal feed ingredients, respectively. The Potash segment mines and processes potash in Canada and the United States, and sells potash in North America and internationally.

The fertilizer sector has been improving and it appears the worst is over. MOS, POT and TNH are trending higher. The -67 cent pullback on Tuesday was nothing. Goldman upgraded the sector this week, Monsanto had a positive outlook and Mosaic said fertilizer prices were economical for farmers and a value buy. The 100-period average on the 30 min chart has been support.

Sell Short Dec $55 Put MOS-XK currently $.59, stop loss MOS @ $57.50
Don't enter this position unless the Dow is above 10300.

Chart of MOS

PCP - Precision Cast Parts $109.62

Precision Castparts Corp. (PCC) is a manufacturer of complex metal components and products, provides investment castings, forgings and fasteners/fastener systems for aerospace and industrial gas turbine (IGT) applications. The Company also provides investment castings and forgings for general industrial, automotive, armament, medical and other applications; nickel alloys and product forms, as well as cobalt alloys, for the aerospace, chemical processing, oil and gas, pollution control and other industries; specialty alloys, waxes for the investment casting industry; refiner plates, screen cylinders and other products for the pulp and paper industry; low-pressure sewer systems; gas monitoring systems for the power generation industry, and metalworking tools for the fastener market and other applications.

All the dips have been bought on PCP and the 100-period average has been support. The dip on Tuesday failed to reach that support before finding buyers. This is an expensive stock for a 65-cent premium but the put is $5 out of the money and 7 days to go.

Sell Short Dec $105 Put PCP-XA currently $.65, stop loss PCP @ $108.25
Don't enter this position unless the Dow is above 10300.

Chart of PCP


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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)