With the market most likely to be in a holding pattern over the next week should we add to longs or hold what we have got?
That is the $64 question. Is the market really going to be in a holding pattern next week or will we see a continued buy the rumor rally? Another option would be a sell the news event before the news actually occurs.
Everyone knows the market has priced in an additional Fed move and a republican win but are those things really going to happen? The republicans are likely to win the house but not the senate so is that enough to energize traders to buy the market AFTER the election?
The FOMC has also been giving mixed signals about the potential for QE2. Bernanke pretty much confirmed it but other Fed heads have cautioned about taking him literally saying there is still a heated discussion on the topic. If the big QE2 ($500B to $1T) turns out to be $100 billion and possibly additional increments farther out in the future will trader still be excited?
Fortunately all those events won't come to a head until Wednesday Nov-3rd. There may be some volatility ahead of the event as funds that held winning positions over their Oct-29th fiscal year end might decide to lighten up on Monday ahead of the events.
You just never know how the chips are going to fall. I picked out seven potential plays for Monday that could see some premium shrink if the market remains stable all week. I only added three as formal plays but I am listing the other four if you feel aggressive.
WYNN - Wynn Resorts $104.40
Our old faithful Wynn Resorts is back again because it always has high premiums. Wynn shares are going to decline at the open on Monday because they filed to sell shares in a new offering after the market closed on Friday. There was no share amount listed in the filing. It would be a shelf offering meaning they could sell shares whenever they needed in the future. How this will impact the stock price is unknown but I suspect traders will take profits from the gains over the last two weeks. WYNN closed at a new high on Friday.
I am going to recommend the $90 strike that is $14 out of the money. If WYNN drops $5 at the open that should pump up the premiums on the $90 strike. If it drops more than $5 I would not enter the trade and we will reevaluate on Monday night.
Earnings are Nov 2nd so we will be out by next Monday.
Enter trade only if S&P-500 is positive and WYNN is over $99.
SELL November $90 PUT (WYNN-10W9000) currently $1.15 stop WYNN @ $97.25
Chart of WYNN
CRM - SalesForce.com - $107.90
CRM is recovering from a drop in early October on the cloud computing problem at Equinx. That company warned and it took down everyone else that was even remotely involved in cloud computing. CRM is not in the same business as EQIX so the decline was over done and CRM is finally recovering.
CRM is wedging up to resistance at $108 and could be preparing for a breakout to the upside if the Nasdaq can find some traction. I am recommending the $95 strike with CRM at $108. That gives us plenty of room. Earnings are not until the 17th of November.
Enter trade only if S&P-500 is positive and CRM is positive.
SELL November $95 PUT (CRM-10W9500) currently $1.80 stop CRM @ $102.00
Chart of CRM
CTRP - Ctrip.com - $50.88
Ctrip.com is a leading travel service provider of hotel accommodations, airline tickets, packaged tours and corporate travel management in China. CTRP has been growing at an accelerated rate and closed at a new high on Friday. Earnings are Nov 2nd and I am expecting a continued ramp into the earnings report. We will exit on Monday the 1st.
Enter trade only if S&P-500 is positive and CTRP is positive.
SELL November $47 PUT (CTRP-10W4700) currently $1.15 stop CTRP @ $49.50
Chart of CTRP
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)