With the end of December normally bullish that gives us 8 trading days to try and skim some put premiums before rolling crossing the tax year expiration date and facing a potential dip in the market.
Futures are up on Sunday night but not very convincingly at +3. Friday's recovery by the Dow from a dip to support at 10260 suggests fund managers may try to pin the averages at their current levels until the calendar rolls over to 2010. I am going to add several more plays tonight with a plan to scalp a few bucks and be out before New Year's Eve.
A couple of these plays are aggressive. Choose only the ones you feel comfortable playing. There is never any requirement to enter every play. Think of it as a buffet where you can pick and choose whatever looks appetizing today.
DO NOT ENTER any of these positions if the market opens down. Wait until the Dow is over 10350 before entering the positions.
The Steel Dynamics position hit our stop on the market dip on Friday and cost us 45-cents.
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AKAM - Akamai Technologies $25.49 (moderate risk)
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. The Companyâ€™s solutions are designed to help businesses, government agencies and other enterprises. It offers services and solutions for digital media and software distribution and storage, content and application delivery, application performance services and other specialized Internet-based offerings.
Akamai appears to be moving steadily higher and with tech normally favored as an end of year investment I believe support will hold and we could see a new high next week assuming the market cooperates.
Sell Short Jan $25 Put UMU-ME currently $.75, stop loss AKAM at $24.75
This could be a little more risky than a normal play because AKAM is just over $25 and the stop is just under the strike price. Pass on the play if the risk bothers you.
FWLT - Foster Wheeler $29.30 (conservative risk)
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.
Foster Wheeler appears to have found support at $28 and with a positive year end market could move over short-term resistance at $29.50 and possibly $31. As a small cap stock in the energy, facilities management business investors could pick it as a holiday present for themselves.
Sell Short Jan $28 Put UFB-MK currently $.75, stop on FWLT at $27.75
Chart of Foster Wheeler
IWM - Russell 2000 ETF $61.14 (conservative risk)
The iShares Russell 2000 Index Fund seeks investment results that correspond to the price and yield performance of the small cap stocks which comprise the Russell 2000 Index.
The IWM rebounded last week from about $60.33 with another higher low pattern. If we get a Santa Claus rally we should not see a return to $60 without some negative news event. We only need it to stay above $61 for the next week for the premium to decay sharply.
Sell Short Jan $60 Put DIW-MH currently $1.22, stop on IWM at $60.25
Chart of IWM
HOS - Hornbeck Offshore Svcs $23.86 (conservative risk)
Hornbeck Offshore Services, Inc. operates offshore supply vessels (OSVs), multi-purpose support vessels (MPSVs), and a shore-base to provide logistics support and specialty services to the offshore oil and gas exploration and production industry, primarily in the United States, Gulf of Mexico and select international markets. The Company, through its subsidiaries, also operates ocean-going tugs and tank barges that provide transportation of petroleum products, primarily in the northeastern United States, Gulf of Mexico and Puerto Rico.
HOS appears to have found a bottom at $22 and starting to accelerate higher.
Sell Short Jan $22.50 Put HOS-MX currently $.50, stop on HOS at $22.75
Chart of HOS
PCP - Precision CastParts $112.38 (aggressive risk)
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.
PCP retested support and it came at $110 instead of $108 this time. The long-term trend is higher and a positive market should find fund managers window dressing with this stock. Just be out by Dec-31st.
Sell Short Jan $110 Put PCP-MB currently $2.30, stop on PCP at $110.50
Chart of PCP
IOC - Interoil Corp $69.49 (aggressive risk)
InterOil Corporation (InterOil) is an integrated energy company operating in Papua New Guinea. The Company operates in four business segments: Upstream, Midstream, Downstream and Corporate. Upstream includes Exploration and Production, which explores oil and natural gas in Papua New Guinea. Midstream Refining produces refined petroleum products at Napa Napa in Port Moresby, Papua New Guinea for the domestic market and for exports, and Midstream Liquefaction includes developing an onshore liquefied natural gas (LNG) processing facility in Papua New Guinea.
IOC has been rocketing higher and found support at $65 on the latest dip. The violent rebound on Friday inflated option premiums. This is a play to capture that premium.
Sell Short Jan $65 Put IOC-MM currently $3.30, stop on IOC at $66.50
Chart of IOC
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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)