The dollar is plunging again overnight and the futures are moving sharply higher.
After a day of consolidation the markets appear ready to charge off again on Wednesday if the dollar remains under pressure. There are no economic reports of importance and the bond market will be closed for Veterans Day. Volume should be horrible but conducive to a decent short squeeze. Yes, there are still shorts in the market.
The S&P is the index analysts will be watching as it attempts to break over resistance at 1100. I will be watching the Russell to see if it will be rolling over while the big caps are getting all the cash.
I am raising the stops on our two positions and adding a third. The falling dollar is pushing the price of oil higher and we did get several days of production shut in for Hurricane Ida. That will not show on the inventory report on Wednesday but it will show up as a drop in supplies the following week. I am adding an energy play on the overnight rise in oil prices and the falling dollar.
SGY $20.00 - Stone Energy Corp
Stone Energy Corporation (Stone Energy), is an independent oil and natural gas company engaged in the acquisition and subsequent exploration, development, and operation of oil and gas properties located primarily in the Gulf of Mexico (GOM). The Company also has operations in the Appalachia region.
Stone Energy surprised everyone last Wednesday with a +49% jump in profits for Q3 when nearly every other driller/producer were posting declines. Stone had the audacity to actually raise guidance. SGY spiked on the earnings news and then spent several days consolidating the gains. I believe with oil prices set to rise we could get a decent bounce out of SGY given they are outperforming their peers.
Sell to Open Nov $22.50 Put STQ-WX currently $2.65, Stop loss SGY @ $19.40
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)