Our third play launch for the month is solidly in the green and futures are exploding higher late Sunday.
The holiday week appears to be off to a good start if the futures hold overnight. The news behind he rising futures is a bailout of Ireland. After weeks of claiming they did not need a bailout they finally said they would start formal negotiations with the IMF this week. The IMF pledged to arrange a loan for Ireland for as much as 100 billion euros. ($137 billion) In return the Irish government will cut its deficit to less than 3% of GDP by 2014. Another paper said the amount could be as much as 120 billion euros ($164 billion) For a country with only five million people that equates to about $32,000 per person. A U.S. bailout of that size would cost $10 trillion. We are obviously on our own.
On my own is exactly where I want to be. I spent about four hours on Saturday just looking for plays. I came up with 18 serious candidates but with futures up +7.50 Sunday night I am having a tough time deciding which to play. The gap open fills are almost always an eventual loser when the market begins to slip later in the week. The gap open deflates the premiums and then they inflate again later in the week.
The Thanksgiving week in the markets is historically bullish. For that reason I was planning on adding more plays than usual today. Obviously you don't have to take them all but I am going to give you plenty to choose from. The table below contains the plays I still think are worthy but just not enough room in the newsletter.
Additional Play List
I am going to add a couple of aggressive plays today but not in this newsletter. I will produce a second newsletter today with those plays and the play explanation for my aggressive strategy.
Aggressive plays contain no more risk than a normal play and have the same risk profile as a covered call. The rewards are just a lot greater.
Current Position Changes
LVS - Las Vegas Sands $49.43
LVS rallied on news of the canceled Harrah's IPO. What is bad for one casino group must be good for another. Everybody knows the story of LVS and WYNN and their improved fortunes because of their Macau casinos.
Enter this trade only if the S&P and LVS are positive
Sell Short LVS Dec $45 Put (LVS10X4500) currently $1.24, stop $46.50
Chart of LVS
AMZN - Amazon.com $164.78
Amazon rallied last week after announcing that customers can now buy and gift ebooks for the kindle or other Kindle app devices. You can give a gift book and it will show up on the recipient's Kindle. Amazon is expecting a blowout holiday season with the new Kindle priced at $139. It is a heck of a bargain and next to the iPad it will probably be the most gifted electronic device this year.
Enter this trade only if the S&P and AMZN are positive
Sell Short AMZN Dec $155 Put (AMZN10X15500) currently $2.36, stop $161.75
Chart of AMZN
FFIV - F5 Networks $122.75
FFIV declined after Cisco's earnings on the idea that every networker was experiencing the same problems as Cisco. After Dell's earnings proved it was a Cisco problem and not an industry problem the networking sector began to recover. A move over $125 by FFIV should trigger some short covering.
Enter this trade only if the S&P and FFIV positive
Sell Short FFIV $115 Put (FFIV10X11500) currently $2.75, stop $117.50
Chart of FFIV
OIH - Oil Service Holders ETF $131.04
The OIH is an ETF containing the major oil service firms like SLB, HAL, NOV, WFT, etc. This sector has almost fully recovered from the recession and from the BP disaster. The OIH is right on the verge of breaking out to a new high. With the dollar dropping, oil prices rising and the economy recovering this group should continue to do well.
Enter this trade only if the S&P and OIH are positive
Sell Short OIH Dec $128.00 Put (OIH10X12800) currently $2.70, stop $128.25
Chart of OIH
FCX - Freeport McMoran $101.78
This is purely a play on the declining dollar and the corresponding rise in gold and copper. FCX investors took profits last week but they should come running back if the dollar drop overnight continues.
Enter this trade only if the S&P and FCX are positive
Sell Short FCX Dec $95.00 Put (FCX10X9500) currently $2.18, stop $98.50
Chart of FCX
RIMM - Research in Motion $58.64
I am expecting RIMM to have a great holiday season and I believe other investors will expect that as well. The Verizon "buy one Blackberry, get three free" promotion is going to really add up for new subscriptions at RIMM. The stock has decent support at $56 and rallied for the last two days.
Enter this trade only if the S&P and RIMM are positive
Sell Short RIMM Dec $55.00 Put (RIMM10X5500) currently $1.80, stop $56.75
Chart of RIMM
VMW - WMWare $80.83
VMW has had an amazing recovery since the Wednesday dip to $74. The stock has found new life on the better than expected guidance from Salesforce.com. I do not expect this to slow down. That was a game changer for the cloud sector.
Enter this trade only if the S&P and VMW are positive
Sell Short VMW Dec $75.00 Put (VMW10X7500) currently $1.40, stop $77.75
Chart of VMW
New Long Term Recommendations
IWM - Russell 2000 Index ETF - $72.45
This is a change in description from the last time I ran the IWM play. The current premiums are telling me the market is so sure we are going higher that OTM strikes are nearly worthless. With the IWM at $72 we have exactly the same risk in selling a $72 strike as a $75 strike because the extra premium received is the difference in price exposure. We don't have to have the IWM close above $75 at expiration because we will not hold it that long. Once we have a decent profit we will tighten the stops and let it ride until the market takes us out.
Sell IWM Jan $75 Put (IWM11M7500) currently $4.37, stop $71.65
Chart of IWM
SPY - S&P-500 SPDR - $120.29
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.
Like the IWM we don't have to have the SPY close over our strike to be profitable. We just need it to move close so the $6 premium evaporates to a reasonable level.
Sell SPY Jan $125 Put (SPY11M12500) currently $6.38. Stop 119.25
Chart of SPY
Look for another email newsletter later today.
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)