Low volume is not confirming the current rally but stocks are still moving higher.
Volume every day last week averaged about 7.4 billion shares per day across all markets. This was the lowest weekly volume since Christmas week. For a market that is breaking over strong resistance this is not the kind of confirmation we want.
However, as we have seen many times in the past the stealth rallies tend to keep going and going and going despite daily reports of their impending demise. I would like to think this was one of those rallies and we will continue to move over resistance. Eventually those seeing the glass half empty will decide they need to join the party instead of preach doom and gloom.
The portfolio was pretty stable last week and several stocks sprinted ahead. We lost Toyota to a stop on Wednesday but we had been in the play long enough that we escaped with a 45-cent profit.
I am adding five new plays today but you are not required to play all six. Just pick a couple that make sense to you. I am still waiting on the return of a trending market so I can add some aggressive positions so keep watching.
Check the graphic for the new stops on existing plays.
MTB - M&T Bank - $76.60 (Naked Put Write)
MTB announced a quarterly dividend of 70-cents last week payable on March 1st to holders on Feb 26th.
Warren Buffett, Bill Gates, Murray Stahl and Jeremy Grantham all own MTB. 75% of the banks 14,000 employees own the stock. While none of these facts guarantee a continued rally it does mean that some deep pocket investors are confident of the long-term trend.
I am going to recommend the $75 March put but the $70 put still has some decent premium if you want to be farther out of the money.
Sell MAR $75 PUT MTB 10O75 currently $2.15, Stop at MTB $74.75.
Chart of MTB
X - US Steel - $53.35 (Naked Put Write)
The recovery appeared to be gaining converts last week as the materials stocks rallied. I think it was more wishful thinking but the two-week rebound in steel stocks is gaining ground. US Steel bounced from its 200-day average and has plenty of room to run before real resistance.
I am going to pick the $50 put because there appears to be decent support at $50. The $48 put still has $1.15 in premium so it would work also.
Sell March $50.00 Put X10O50 currently $1.72, Stop X at $49.75
Chart of X
CMG - Chipotle Mexican Grill $104.96 (Naked Put Write)
CMG reported earnings on the 12th and unlike other fast food chain stores they were largely unaffected by the economic slowdown. They posted strong sales and an even stronger balance sheet. With only $3.9 million in debt and $270 million in cash they are a beacon of strength.
The stock continues to climb after earnings as the potential grows for a stock buyback or a large one time dividend to return that cash to shareholders.
I want to go out on a limb here with the $105 put. The chart shows what appears to be a pending breakout over resistance at $105. That would be the aggressive play. For the newsletter I am reluctantly going to play it safe with the $100 put.
Sell March $100.00 PUT CMG 10O100 currently $1.55, Stop CMG at $102.95
Chart of CMG
NOV - National Oilwell Varco $45.08 (Naked Put Write)
NOV is moving over resistance at $45 and with the news this weekend about the $10 billion acquisition of SII by SLB the service stocks should be rocking on Monday.
I am going with the at the money strike of $45 because I expect NOV to gap higher at Monday's open on the SII news.
Sell March $45.00 PUT NOV 10O45 currently $1.65, Stop NOV at $43.95
Chart of NOV
COF - Capital One $37.79 (Naked Put Write)
COF is in rally mode because the average delinquency percentage of accounts at the credit card issuers is falling. Despite the unemployment the worst appears to be over for the credit card companies. The numbers reported for January showed another decline in charge offs and delinquent accounts.
I am going with the at the money strike of $37 because I believe these banks were overly sold in the February decline. With credit risks slowing these could attract some of those reluctant buyers.
Sell March $37.00 PUT COF 10O37 currently $1.23, Stop COF at $36.75
Chart of COF
February Recommendation History
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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)