Despite a week of market gains that occurred on only one day our positions are still safe.
Friday's payroll report was disappointing but the shorts were unable to push the markets materially lower. The early morning drop was almost completely erased at the close.
Unfortunately this is August and along with September the two worst months of the year. The economy is weakening although double dip fears are easing. The FOMC meets on Tuesday and there is no telling what revelation or action they will reveal.
This is not an environment where we should be loading up the truck with new plays but there are some positive factors in our favor. The Dow Transports and the Dow Total Market Index are suggesting the bulls are not done running despite what the Nasdaq and Russell seem to say.
What I want to avoid is sitting on the sidelines and waiting for an August decline that never comes. Sometimes the biggest rallies are the ones that run counter to a trend because everyone is positioned for the opposite of what is occurring.
We should get a dip on Monday morning as a result of the Hewlett Packard CEO scandal. As a Dow component the -10% after hours dip in HPQ should push the Dow lower on Monday. Hopefully the dip will be bought in anticipation of some new Fed move on Tuesday. If we sell some puts on the opening dip and traders do buy the dip then we can have an opening gap that works in our favor for a change.
I strongly suggest that traders don't take all the potential entries I am going to suggest. Just pick one or two in case the market turns against us.
After doing my research this weekend I came up with a list of potential plays. The ones below are the ones I did not choose to profile for a play. Maybe they fit your risk profile better than the ones I chose so I am listing them for your review.
X $43 $1.12
BG $50 $0.95
TSL $21 $0.82
LVS $26 $0.82
CMP $70 $1.00
MOS $46 $1.02
CTRP $37.5 $1.15
AMZN $115 $1.83
X - US Steel - $48.50
US Steel was crushed after earnings on worries about a slow third quarter. With global economics improving the chart for USS is showing a steady improvement.
SELL September $45 PUT (X-10U4500) currently $1.65 stop X @ $46.50
Chart of US Steel
RIMM - Research in Motion - $53.45
RIMM sold off on the ban of Blackberry phones in Saudi Arabia and possibly in several other Middle East countries. Over the weekend RIMM suggested putting a Blackberry server in Saudi Arabia where the government could monitor unencrypted messages. This appears to have solved the problem and RIMM should rally again next week.
SELL September $50 PUT (RIMM-10U5000) currently $1.98 stop RIMM @ $55.00
Chart of RIMM
FSLR - First Solar - $129.45
FSLR reported earnings on the 30th and the stock was hammered for a $14 loss even though they bet the street. Earnings for the solar companies are volatile because of the timing of deliveries and payment for those deliveries. This is a risky play even though the stock is recovering.
SELL September $120 PUT (FSLR-10U12000) currently $3.70 stop FSLR @ $125.75
Chart of FSLR
AKAM - Akamai Technologies - $39.89
Another stock that was slammed unfairly after earnings and is now starting to recover. The slam inflated premiums and they should bleed off fairly rapidly if the market allows the rebound to continue.
SELL September $37 PUT (AKAM-10U3700) currently $.98 stop AKAM @ $38.15
Chart of AKAM
MELI - Mercadolibre Inc - $65.90
MELI is an online retailer in 12 Latin American markets. We saw last week that Latin America is growing very strongly and one of the world's hot spots of growth. Even Mexico is growing at a 4% clip. Earnings were good but MELI saw its stock slammed at Thursday's open but it quickly recovered and closed at a new high. This volatility inflated the premiums.
SELL September $57.50 PUT (MELI-10U5750) currently $1.25 stop MELI @ $61.75
Chart of MELI
PRU - Prudential - $59.10
Prudential rallied after some stellar earnings last week and it appears the stock is going to break over resistance at the 100-day average at $59. Next resistance is $60 but with a $55 put we can hope the resistance battle takes all month.
SELL September $55.00 PUT (PRU-10U5500) currently $1.27 stop PRU @ $56.50
Chart of PRU
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)