The morning dip took us out of our remaining positions but there was no real damage.
The volatility in this market and the sporadic nature of the various sectors is amazing. Each sector seems to stretch gains for 4-5 days and then gets clobbered by sellers. The market keeps returning to its highs only to sell off again. Strong volume on down days and weak volume on rally days still concerns me that October is not over yet.
We saw better than a 100 point drop on Wednesday when Dick Bove downgraded Wells Fargo to a sell. Why would that impact the entire market when 80% of all the earnings reports are beating the street? It impacted the market because the market is scared. Traders and investors want to be long only as long as the indexes are setting new highs. However, everyone is worried that some event will appear to knock the legs out from under the bull and investors don't want to be smothered in hamburger.
Fortunately the dip this morning was slow to develop and we actually got stopped in the first ten minutes of trading before the real decline appeared. We actually got out of FWLT with a minor profit of 20-cents and that offset the 10-cent loss on FLR. I am trying very hard to not take any material losses and I believe that once we are out of October the November trading should be easier.
I am still waiting for a decent pullback in oil prices to enter some new oil plays but the futures are stubbornly holding over $80 without any fundamental support. Patience is required.
I am adding a new play tonight with a very rare characteristic. They just announced a 3:1 split for the end of November. I do believe this will become more common once the economy is firmly in rebound mode. Many stocks are up 75-100% from their lows and are approaching the point where they can announce splits. We will use those announcements as potential new plays.
NO OPEN POSITIONS
EBIX $65.75 - Ebix Inc
Ebix, Inc. (Ebix) is an international provider of software and e-commerce solutions to the insurance industry. Ebix provides a series of application software products for the insurance industry ranging from carrier systems, agency systems and exchanges to custom software development for all entities involved in the insurance and financial industries. The Company derives its revenue primarily from professional and support services, which includes software development projects and associated fees for consulting, implementation, training, and project management provided to the Company's customers, subscription and transaction fees related to services delivered on an application service provider basis, fees for hosting software, fees for software license maintenance and registration, and business process outsourcing revenue, and software revenue, which includes the licensing of third-party software.
EBIX has a 3:1 split to holders of record as of Nov-30th. Earnings are expected the first week of November. Earnings are expected to double in 2010 and have risen sharply in recent quarters. EBIX has a PE of 22 compared to an average of 38 for the sector. If the market remains positive I am hoping for EBIX to breakout over $65 and hopefully stay in the $70 range or higher for the next couple weeks.
Sell to Open Nov $65 Put IFQ-WM currently $3.40, Stop loss EBIX @ $63.75
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We do not sell out of the money puts for a few cents and then hope the market does not correct and cost us a fortune to exit. I don't like to risk a dollar to make a quarter.
The concept for Option Writer is to find solid momentum plays with enough volatility to inflate the option premiums. We will sell in the money naked puts ahead of the stock price and let the stock rally to our strike.
Selling in the money puts allows us to capture nearly dollar for dollar the movement in the stock price.
Because we are selling in the money that same dollar for dollar move can go against us as well. For this reason we establish tight stops to take us out of the play for a loss of a few cents rather than let the losers grow and "hope" they rally again. In a typical month we could get stopped out of twice as many plays as we close for a profit but those stops will be minimal and the winners worth the trouble.
If you do not have the ability to sell options you can turn the plays into spreads by buying a lower strike put. This will decrease your margin requirements but it will also decrease your profits.
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)