Our dance card is full and we are waiting patiently for the music to start. We have a great portfolio as long as the next move is higher. Will the next song the band plays be the "Charge of the Light Brigade" or "Taps"?
Last week was a little frustrating for me. The spread to close on the entire portfolio reached as high as $12 early in the week but once the premium began to bleed from the long puts that declined to just over $7. Personally I would be thrilled to collect $7 in premium every month because that averages to $700 per contract in profits. Ten contracts would equal $7,000. Of course that is just a mathematical projection and assumed the trader bought an equal amount of every position and I know that never happens. Most buy/sell more of the ones they like and less or none of the ones they don't like. Still the mathematical projection is a simple way of keeping score.
We also saw a decline in energy prices from $75 to $70 and that depressed the energy stocks in the portfolio. The west coast has two hurricanes in progress but so far there has been nothing in the Gulf of Mexico to push prices higher. There is a new storm brewing just off the coast of South America that could head our way. The weather service is estimating a better than 50% chance it will become a named storm over the next 48 hours and the current track is towards the gulf. While I would not wish a hurricane on anyone it would help support crude prices next week.
I believe the market is at a turning point. There are several high profile economic events next week that could confirm the economy is in recovery or begin to dash hopes and point to a second dip. I believe the comments from Intel, Marvel and ST Microelectronics suggest the recovery is solidly underway. However, this could be simply the PC refresh cycle associated with the new Windows release in October. PC makers should be in the building phase today in order to have new PCs with the new Windows OS on dealer shelves by the rumored October 23rd release date for Windows.
Unfortunately that PC refresh cycle is not dependent on the recession ending. This refresh cycle has been three years in the making. It can't pull the economy out of a recession by itself but it should generate a lot of business in the computer sector. PC components have spiked in prices over just the last three weeks. For instance a 4GB stick of Kingston memory has gone from $84 to $109 in just over three weeks and quite a few dealers are out of stock. I believe this is due to the sudden increase in demand because Internet retailers like Newegg.com change prices daily based on sales and inventory trends. Obviously the big PC makers don't buy from Internet retailers but they do make a big dent in the wholesale supply and that affects the retailers. Intel E5430 quad core processors for servers have risen in price from $230-$250 on Ebay to $350-$440. That is clearly a demand spike since those are competitive auction prices based on demand rather than a price set by a retailer.
Hopefully this increased demand for computer equipment will also be seen in increased demand for other items in the ISM report this week. I am also hoping that the Non-Farm payroll numbers show a smaller number of jobs lost or even a small gain but I am not holding my breath.
This week should be marked by some volatility events as we move into September. Monday is month end and hopefully there will be some retirement contributions hitting the market early in the week. Volume should be light and that is dangerous for long positions.
We have seen the decline in premium in our long protective puts to the point where future erosion should not impact our profits. We are totally dependent now on the underlying stocks maintaining upward momentum.
BUCY and WLT are in the most danger of being stopped out. Both need another uptick in oil prices to lift the energy sector and restart their upward motion. HIG is the biggest gainer and is showing no indications of slowing. Because Hartford is doing so well I am going to add Travelers to the watch list as trade this weekend.
When I raised the stops on Thursday I put them as close as I could to prevent any material losses if the market does roll over. I am planning on trailing them higher as the week progresses if we do get a higher market. Crude futures opened higher Sunday night by about 50-cents. S&P futures opened -1.50 lower. With 12 hours of overseas trading before our markets open those numbers will undoubtedly change.
If we are stopped on a spread position ONLY CLOSE THE SHORT PUT. Keep the long put open just in case the decline continues.
Keep your stops in place and your fingers crossed!
New Recommendations - Conservative
TRV - Travelers Companies $49.63
The Travelers Companies, Inc. is a holding company principally engaged, through its subsidiaries, in providing a range of commercial, and personal property and casualty insurance products and services to businesses, government units, associations and individuals. The Company is organized into three business segments: Business Insurance; Financial, Professional & International Insurance, and Personal Insurance.
Travelers has broken out and developed a very nice trend towards higher ground. There is resistance in the $53-$55 range and that is why I am not going with a higher put like a $55.
Use a touch of $48.50 by TRV as a trigger to enter this position.
Sell September $50 Put TRV-UJ currently $1.70, initial stop loss $47.50.
Chart of Travelers
AXP - American Express $34.28
American Express Company (American Express) is a global payments and travel company. The Companyâ€™s principal products and services are charge and credit payment card products, and travel-related services offered to consumers and businesses around the world.
Travelers has broken out over resistance at $30 and continues to make positive comments about improving delinquencies. There is resistance in the $40 range and that is why I am not going with a higher put like a $40.
Use a touch of $33.25 by AXP as a trigger to enter this position.
Sell September $35 Put ABZ-UG currently $1.65, initial stop loss $32.25.
Chart of AXP
TRV - Travelers - Entry trigger $48.50 Sell Sept $50 Put TRV-UJ, Stop $47.50
AXP - Amer Express- Entry trigger $33.25 Sell Sept $35 Put ABZ-UG, Stop $32.25
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)