The opening dip in the markets Thursday morning crushed nearly every high flyer of late. It was definitely a day where scared fund managers pulled the exit trigger in a hurry when they saw trouble looming ahead.
The panic at the open eased as the day progressed but never really let up. The major indexes all closed on their lows and the gloom ahead of the Thursday earnings parade was stifling. Fortunately Oracle and RIMM surprised to the upside and the futures are recovering over night.
The opening gap lower took us out of MCSI at the $32.25 stop for our biggest loss of the month at $1.05. That is not a fun way to cap off a successful week.
I did feel really good about exiting all those positions on Tue/Wed. That was the right move ahead of the Fed's volatility and the expected sell the news event on Thursday. Anyone who held on to those positions in hope of an expiration is sweating right now in hopes Friday is not a repeat of Thursday.
With the futures up and the dollar down I am going to add two plays for Friday. One was suggested by a reader and I think it is a good idea. That is FedEx. They were crushed on earnings news but upgraded guidance and said the economy had turned the corner. I think this weakness might be the opportunity for an entry just below support.
The other is Trina Solar. We just exited Trina at the top with December options and they were knocked back for a decent loss on Thursday because LDK solar warned of a capital squeeze. That does not impact the other stocks directly other than guilty by association. I think this is a buying opportunity.
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FDX - FedEx $85.39
FedEx Corporation (FedEx) is a holding company. The Company provides a portfolio of transportation, e-commerce and business services through companies that compete collectively, operate independently and manage collaboratively, under the respected FedEx brand.
FedEx reported earnings inline with estimates and inline with their preannounced guidance. Unfortunately it was still lower than analysts had hoped. You can tell them $1 for earnings several different times in different ways. They will change their estimates to $1.02 - $1.05 but secretly hope you pull a RIMM and beat by ten cents. When you report $1 as you said you wood they are disappointed. Pricing was soft because of lower package volume. There were extra costs due to some employee bonus programs restarting and jet fuel was higher than expected. Definitely not the end of the world. To top that they shipped a MILLION more packages on Monday (14.1 million) for their busiest day of the year. How can you announce you shipped a million more packages in one day and have investors upset?
I think the drop was over done and while we could see some more weakness there is decent support in the $81-$82 range. I am going to recommend the January $80 put with a stop below support.
Sell Short Jan $80 Put FDX-MP currently $1.40, stop loss FDX at $80.50
This could be a little more risky than a normal play because we are essentially trying to catch a falling knife or at least guess where it will bounce. Pass on the play if the risk bothers you.
TSL - Trina Solar $50.88
Trina Solar Limited is an integrated solar-power products manufacturer based in China. The Company produce monocrystalline photovoltaic (PV) modules ranging from 165 watts to 230 watts in power output and multicrystalline PV modules ranging from 210 watts to 230 watts in power output. The PV modules are built to general specifications, as well as to the customersâ€™ and end-usersâ€™ specifications. The Company sell and market the products globally, including in a number of European countries, such as Germany, Spain and Italy. The Company sell the products to distributors, wholesalers and PV system integrators, including Enipower Spa, Gestamp Solar S.L. and IBC Solar AG.
Trina is becoming a favorite in the solar power sector and has a great chart. The dip on Thursday was sector related not specific to Trina. I am going to recommend the $45 strike, which is below support at $46. Those who are not afraid of a little more risk might want to sell the $48 strike for $2.20.
Sell Short Jan $45 Put TSL-MI currently $1.25, stop on TSL at $45.95
Chart of Trina Solar
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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)