Last week's crash pushed thousands of stocks back to support and created a great buying opportunity.
The problem with the charts on all those stocks is that they all look the same. Everyone is teetering on the cliff edge and until the close on Monday we don't know which ones are going to take that next fatal step and which are going to rebound on short covering.
I probably looked at more than 500 charts this weekend. With only two weeks left on the May expiration cycle I wanted something that still had premium and a decent chance of short covering.
There were only a couple of stocks I was willing to bet on. Overnight the Dow futures are +300 and we are assured of a monster gap open on the Eurozone stability package. The $64 question is what happens after the gap? I do not want to load the boat for two reasons. First, put premiums are going to fall sharply at the open. That means we have to sell strikes that are almost in the money. Secondly, if we get a gap and crap those deflated premiums would instantly super inflate again with us on the losing end. It is best not to load the boat on gap opens.
With that in mind I only added two stocks that I believe have a reasonable chance of a gap and a reasonable chance of staying at a higher level even if the market gains fade away.
Those two stocks are Goldman Sachs and The US Oil Fund. Goldman is in settlement talks with the SEC and a settlement could be announced any day. Goldman was positive on Friday despite the -139 point Dow.
The price of crude is shooting higher overnight because of the EU stability package. The dollar is falling and that will push crude prices higher. The size of the stability package at $1 trillion is guaranteed to put fears of an Eurozone collapse to rest.
GS - Goldman Sachs - $143.13
Is the third time a charm? We escaped with a profit the last two times we played Goldman and with them working on an SEC settlement they could be up strongly on Monday.
I am going to recommend the $140 put with two weeks until expiration. For those that want to be more aggressive I would sell the May $150 put.
ENTER TRADE ONLY IF GS is positive.
SELL MAY $140 PUT (GS-10Q14000) currently $4.50, stop GS @ $142.00
Chart of GS
USO - U.S. Oil Fund $36.31
Crude prices are up +2.41 Sunday night and the USO should gap open to about $37.75. With the dollar diving and the EU safe from contamination we should see crude prices continue to rise.
I am recommending the May $37 Put that should be just under the gap open.
ENTER TRADE ONLY IF USO is over $37.
SELL MAY $37 PUT (USO-10Q3700) currently $1.61, stop USO @ $36.50
Chart of USO
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)
Prices Quoted in Newsletter
At Option Investor we have a long-standing policy prohibiting the editors and staff from actually trading the individual recommendations in order to conform to SEC rules concerning trades.
The prices quoted in the newsletter are the end of day prices in most cases.
When discussing fills or stops the prices quoted are the bid/ask at the time the entry trigger or exit stop is hit. This is NOT a price that someone on staff actually got using a live order.
For entry/exit points at the market open the prices quoted will be the opening print. The majority of the time the readers are able to get a better fill than the opening print because of market maker bias at the open.
For trades with an opening qualification the prices quoted will be the bid/ask at the time the qualification was met.
All of these rules normally produce worse prices than an active trader would normally get. Because they are standardized there may be some cases where a price quoted was better than an actual fill. If you received a price that was dramatically different than what was quoted just send us an email and we will use your price.