The end of the day rebound off support was bullish. Futures are up overnight and expiration is only a week away. I am adding a couple more positions for the December expiration.
The Dow opened down but rebounded to move over our 10,300 trigger point at 10:44 AM. We entered the three positions from last night on AKAM, MOS and PCP. Unfortunately when the markets rolled over in mid-afternoon the PCP position was stopped out by 6 cents. The stop was $108.25 and the dip took PCP to 108.19. The problem was the big -$2.20 drop at the open that took PCP below our stop so when the rebound came the entry point was triggered just above the stop and we did not have that $2 cushion. We lost 15-cents on the play so no harm, no foul.
Oil prices dipped to $70.13 and I really wanted to add an oil position tonight but I went through my list of about 250 energy stocks and could not find one that worked. The charts are really ugly and most have broken support. Those that looked even remotely promising were sitting right on a strike and there was no play. I settled for an at the money option on the USO. As long as oil holds $70 tonight I expect a temporary rebound that should be good for a point on the USO.
The S&P declined at the open to strong support at 1085, rebounded to 1095 and again in the afternoon dropped to support at 1085 and rebounded again to close just under the high of the day. I view this as bullish. Unfortunately the Russell barely made it back to positive territory so it looks like fund managers are putting money back into the big caps to wait out the year.
The dollar declined again and after an intraday rally is trading back under 76.0 on the dollar index. The downgrade of Spain's debt was not enough to keep the dollar moving higher. Falling dollar equals rising equities lately so I am going to take another shot at a couple entries in the morning.
In order to enter these positions I want the Dow to be above 10325. That gets us above the two afternoon resistance points and hopefully in a move higher. If the Dow opens down we want to enter the positions if it rebounds to trade over 10325 whether it is 11:AM or 2:PM.
I know that seems like nit picking but the volatility has been huge lately and I want to qualify as many entries as possible. For me to sit in front of my PC and decide at 9:30 if I want to enter a play is one thing but pulling plays out of a play list the night before and blindly saying go long at the open is a huge risk in this market. Once we get out of the December expirations I am going to use triggers on the individual plays for entry points.
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Current Open Positions
FCX - Freeport McMoran Copper & Gold $78.36
Freeport-McMoran Copper & Gold Inc. (FCX), through its wholly owned subsidiary, Phelps Dodge Corporation (Phelps Dodge) is a copper, gold and molybdenum mining company. The Companyâ€™s portfolio of assets includes the Grasberg minerals district in Indonesia, which contains single recoverable copper reserve and the single gold reserve of any mine; significant mining operations in North and South America, and the Tenke Fungurume development project in the Democratic Republic of Congo (DRC).
Freeport was crushed when gold prices fell more than $100 an ounce over the past week. FCX found support at $76 and had a decent rebound to $78.35 on Tuesday. With the dollar slipping again I expect gold to recover somewhat. This is a short play for 3-5 days.
Sell Short Dec $75 Put FHZ-XO currently $.87, stop loss FCX @ $76.50
Don't enter this position unless the Dow is above 10325.
Chart of FCX
TSL - Trina Solar $47.81
Trina Solar Limited is an integrated solar-power products manufacturer based in China. The Company produce monocrystalline photovoltaic (PV) modules ranging from 165 watts to 230 watts in power output and multicrystalline PV modules ranging from 210 watts to 230 watts in power output. The PV modules are built to general specifications, as well as to the customersâ€™ and end-usersâ€™ specifications. The Company sell and market the products globally, including in a number of European countries, such as Germany, Spain and Italy.
Some solar stocks have withered under the heat of competition but Trina is setting new highs. The dip to $46 on Tuesday saw a decent rebound and a positive market could produce further dip buying.
Sell Short Dec $45 Put TSL-XI currently $.75, stop loss TSL @ $45.95
Don't enter this position unless the Dow is above 10325.
Chart of TSL
USO - United States Oil Fund $35.89
The USO is a domestic exchange traded security designed to track the movements of light, sweet crude oil ("West Texas Intermediate"). USO issues units that may be purchased and sold on the NYSE Arca. The investment objective of USO is for the changes in percentage terms of its units' net asset value ("NAV") to reflect the changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the changes in the price of the futures contract for light, sweet crude oil traded on the New York Mercantile Exchange, less USO's expenses.
This is a play based on crude at $70 rather than a specific level on the USO. The close at $35.89 makes the at the money strike ($36) worth $.92 at the close. If the price of crude follows the pattern of the last couple months we should see a temporary rebound from $70 that lasts for 2-3 days. This should be enough time for the premium to decay significantly.
Sell Short Dec $36 Put UBO-XJ currently $.92, stop loss USO @ $35.50
Don't enter this position unless the crude prices are above $70.25.
Chart of USO
Crude Oil Chart
December Closed Positions
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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)