With the VIX at a two-year low at 17.42 the available premium on March options is nearly zero. Time to shift gears and start looking ahead to April strikes.

I literally looked at 700-800 charts in an effort to find anything with any premium left for March. There were none, zero, zilch, nada. The rally from last week made it even more difficult because almost every stock has a hockey stick spike for the week and you can bet some of those gains will bleed away.

I don't use scanning software. I keep lists in Qcharts of potential stocks as I trip over them in my research. I physically look at each chart, check the closing price relative to possible strikes, look at resistance and support, current trend, sector health and finally the available premiums. Out of more than 700 charts I came up with just over 40 possible plays.

From that list I again looked at those factors above and compared them against each other for relative safety, range of movement and sector health. I chose eight to put in the newsletter today. Since everyone does not have the same risk profile I am listing the rest of the stocks in the graphic below. If you have money burning a hole in your account and want to add some more plays for April then here is a screened list to choose from. The column labeled price is the stock price rounded to the nearest dollar. The percent column is the premium divided by the strike price and expressed as a percentage. That way you can see the relative comparison of different premiums in relation to strike prices.

Stock Table

I am adding eight plays tonight with April strikes. Hopefully the rally will stick with a minimum of profit taking and we can capture some of the big premiums without too much risk. If the stocks move up just a little the premiums should collapse once they become front month. The plan would be to close them early rather than wait the full six weeks.

Some of these plays are more risky than others so pick the ones YOU like and don't just sell them all because they are in the newsletter.

Jim Brown



Current Portfolio



Current Positions


CLF - Cliffs Natural Resources $60.57

Put in a bid to buy back the option at 10-cents or less.
Change the stop loss to $55.75.

FDX - FedEx $86.92

Put in a bid to buy back the option at 10-cents or less.
Change the stop loss to $84.75.

VMW - VMWare $53.95

Put in a bid to buy back the option at 10-cents or less.
Change the stop loss to $50.25.

KCI - Kinetic Concepts $43.00

KCI option premiums went up instead of down last week.
Change the stop loss to $42.25.

FCX - Freeport McMoran $80.73

Put in a bid to buy back the option at 10-cents or less.
Change the stop loss to $77.75.


New Recommendations


UYM - Proshares Basic Materials ETF - $34.91

The pricing news on copper and steel last week is pushing the basic materials sector higher. There was a slight pullback on Thursday that gave us support at $33.25 on the UYM. I am going to pick the $31 strike just under that support.

ENTER ONLY if UYM is positive, and S&P is positive at the open on Monday.

Sell APR $31 PUT UYM 10P3100 currently $.95, Stop at UYM $32.95.

Chart of UYM


BUCY - Bucyrus Intl - $65.82

The coal pricing news from BHP and the acquisition by India pushed the coal stocks and the coal machinery stocks higher. BUCY has support at $63 and the strike I am recommending is the $60 strike, currently $6 out of the money.

ENTER ONLY if BUCY is positive, and S&P is positive at the open on Monday.

Sell APR $60 PUT BUCY 10P6000 currently $1.85, Stop at BUCY $62.75.

Chart of BUCY


WLT - Walter Energy - $88.55

Walter is breaking out on the coal pricing news from BHP and the acquisition by India because Walter has a strong coal component. WLT has support at $83 and the strike I am recommending is the $80 strike, currently $8 out of the money.

ENTER ONLY if WLT is positive, and S&P is positive at the open on Monday.

Sell WLT $80 PUT WLT-10P8000 currently $2.05, Stop at WLT $82.75.

Chart of WLT


BHP - BHP Billiton Ltd - $79.22

BHP lead the breakout of the miners by announcing the sale of coal at $200 per ton when the going price was $135 per ton. BHP is not just a miner but also an oil company with millions of barrels of reserves. This has the benefit of coal, gold, copper and oil. BHP has support at $76 and the strike I am recommending is the $75 strike, currently $4 out of the money.

ENTER ONLY if BHP is positive, and S&P is positive at the open on Monday.

Sell BHP $75 PUT BHP-10P7500 currently $1.75, Stop at BHP $75.75.

Chart of BHP


PCP - Precision Cast Parts - $120.30

PCP broke out over its resistance high on Friday with support at $116. The strike I am recommending is the $110 strike, currently $10 out of the money. Any decline should stop well above us at that $116 support. If you want to live a little farther out on the edge the $115 strike is worth $2.05 today.

ENTER ONLY if PCP is positive, and S&P is positive at the open on Monday.

Sell PCP $100 PUT PCP-10P11000 currently $1.05, Stop at PCP $115.00.

Chart of PCP


TM - Toyota Motors - $76.91

Toyota has been crushed by the recall news but apparently buyers are coming back. The stock is trying to break over February resistance at $77 and once over should move quickly higher as that will be confirmation to cautious buyers that the worst is over. The strike I am recommending is the $70 strike, currently $7 out of the money. Any decline should stop well above us at support at $73.

ENTER ONLY if TM is positive, and S&P is positive at the open on Monday.

Sell TM $70 PUT TM-10P7000 currently $1.00, Stop at TM $72.75.

Chart of TM


MSTR - Microstrategy Inc - $91.33

MSTR is recovering from a major drop back in early February after their earnings disappointed the street. They have since rebounded significantly and garnered several upgrades. I believe they are going to return to those pre earnings levels. The strike I am recommending is the $85 strike, currently $6 out of the money. Initial support is at $88.

ENTER ONLY if MSTR is positive, and S&P is positive at the open on Monday.

Sell MSTR $85 PUT MSTR-10P8500 currently $1.55, Stop at MSTR $87.75.

Chart of MSTR


GMCR - Green Mountain Coffee Roasters - $87.73

GMCR is the current crowd momentum favorite. This stock is extremely volatile and the slightest bit of news can push it $3-$4 in either direction. The strike I am recommending is the $80 strike, currently $8 out of the money. Initial support is at $86 and again at $83.

ENTER ONLY if GMCR is positive, and S&P is positive at the open on Monday.

Sell GMCR $80 PUT GMCR-10P8000 currently $1.55, Stop at GMCR $84.75.

Chart of GMCR


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)