The worst week for the markets in more than three months produced some pain for premium sellers.
The earnings warning from Cisco and the various other news events caused the markets to suffer their largest weekly loss in over three months. It was not a big loss compared to the gains over the last two months but it was still painful for us.
Deckers Outdoors was our last position and it was stopped out on Friday for a 60-cents loss.
I still believe this is a buying opportunity for the next 4-6 weeks as long as the S&P does not decline below 1190 with 1175 the absolute line in the sand.
I am going to add some positions again this weekend on the hopes the selling is over.
I wrote last weekend I was going to add some aggressive positions and a lengthy play description later in the week. When I wrote that I did not know my wife was going to the hospital Sunday night and be there most of the week. She came home Thursday night, which did not leave me any time to follow through on my plans. Unfortunately she went back into the hospital this Sunday afternoon so I am behind the curve once again tonight. I will try to get it done later this week if the medical problems work out.
Current Position Changes
DECK - Decker Outdoors (Stopped)
Deckers was stopped out on Friday at $59.50 with the option price at $1.55. That was a 60-cent loss on the position.
I looked at a couple hundred charts again this weekend and I keep coming back to some we have played before because they have good premiums well away from the current price and decent trends.
FCX - Freeport McMoran Copper $103.90
Freeport traded in an $8 range last week and closed right in the middle of that range despite a $60 drop in gold prices and a sharp drop in copper. As of Sunday night China has not hiked interest rates and the Chinese economy is still growing at a 10% clip. The dollar will eventually fall again and the price of commodities will rebound.
Enter this trade only if the S&P and FCX are positive
Sell Short FCX Dec $95 Put (FCX10X9500) currently $2.47, stop $99.75
Chart of FCX
AMZN - Amazon.com $165.69
Amazon gave back nearly $5 on Friday in the market meltdown. This may have been accelerated because of the censorship question over a book about pedophiles that garnered a lot of press and was taken off the site on Friday. Regardless of the reason for the drop this could be a buying opportunity if tech stocks can find some traction on Monday.
Enter this trade only if the S&P and AMZN are positive
Sell Short AMZN Dec $155 Put (AMZN10X15500) currently $3.30, stop $160.75
Chart of AMZN
VMW - VMWare $80.99
VMWare continues its slow trend higher but has enough intraday volatility to keep option premiums healthy. There was a $2.28 loss on Friday but plenty of buyers at support at $80.50. Cloud computing is still growing and this is the leading company in the space.
Enter this trade only if the S&P and VMW are positive
Sell Short VMW Dec $75 Put (VMW10X7500) currently $2.05, stop $79.25
Chart of VMW
FFIV - F5 Networks $123.77
FFIV shook off the Cisco warning and the loss to shares of other companies in the sector. FFIV actually posted a gain on Friday compared to the broad market loss. FFIV is one of four companies expected to significantly outperform Cisco. If the Nasdaq is even slightly positive next week I expect FFIV to breakout of the current consolidation and move higher.
Enter this trade only if the S&P and FFIV are positive
Sell Short FFIV Dec $110 Put (FFIV10X11000) currently $2.25, stop $117.25
Chart of FFIV
FSLR - First Solar $138.47
First Solar lost about $20 at the end of October and was beginning to trend slightly high until Friday. The broader market selling pushed it back to support at $138 but it was still stronger than the broader market. First Solar remains the largest company in the space and the shares are volatile hence the high premiums. Conditions appear to be looking up for the solar sector despite some recent bad news from Germany on tax treatments. First Solar has dozens of large scale projects in motion as it stretches its lead over the competition.
Enter this trade only if the S&P and FSLR are positive
Sell Short FSLR Dec $125 Put (FSLR10X12500) currently $2.17, stop $133.50
Chart of FSLR
TCK - Teck Resources $49.08
Teck is a miner of metallurgical coal, copper and zinc as well as other metals and fertilizer. With the fall of the dollar their fortunes have been improving. However, last weeks rebound in the dollar did not cause a corresponding depression in Teck. Their relative strength suggests they will do well in a positive market.
Enter this trade only if the S&P and TCK are positive
Sell Short TCK Dec $44 Put (TCK10X4400) currently $1.02, stop $46.75
Chart of TCK
Optional plays I considered but elected not to use.
LVS $43 $1.30
RIMM $50 $0.95
MOS $62.50 $1.24
CRM $100 $2.49 (Earnings)
WYNN $100 $2.18
New Long Term Recommendations
IWM - Russell 2000 Index ETF - $72.03
The Russell 2000 ETF declined $2 last week to close at $72. The $70 level should be decent support and hopefully a level we will not see in the near future. If the markets rebound from last week's sell off we should be good for a couple week run.
I am picking the $70 strike because of its relation to support.
Sell IWM Jan $70 Put (IWM11M7000) currently $2.70, stop $71.25
Chart of IWM
SPY - S&P-500 SPDR - $120.20
The S&P-500 is expected to reach 1275 to 1300 by year-end. With it at 1200 today that does not seem like a real stretch even after last week's decline.
The drop last week spiked the premiums on the SPY allowing us to more about 40 S&P points out of the money and actually receive a larger premium than last week.
Sell SPY Jan $116 Put (SPY11M11600) currently $2.75. Stop 117.75
Chart of SPY
Coming later this week!
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)