Just when it looked like the futures were going to tank into Monday's open the news broke that Abu Dhabi stepped in with a $10 billion rescue plan for Dubai. $4.1 billion in payments due on Tuesday will be covered by the loan and there will be no default. Futures exploded on the news for a +8 gain.
The news even stimulated buying in the oil futures, which had dropped to $68.59 early Sunday evening. The dollar also fell back from its six week high. Whether all this good news will last until morning remains to be seen.
This is going to be a critical week for the markets with several inflation reports, a FOMC meeting and earnings from Best Buy, Adobe, RIMM, Palm and FedEx. Plenty of stimulus for traders as they count off the days until year-end.
The stimulus did not come in time for Eagle Materials. We were stopped at $26.50 on Friday's dip for a .85 cent loss.
We were handed some free money on Friday when S&P announced it was adding Visa, Mead Johnson (MJN), Cliffs Natural Resources (CLF), SAIC Inc (SAI) and Ross Stores (ROST) to the S&P-500. Because of prices and strikes not all are worth playing. However, Visa and Cliffs are good candidates. On a day when the markets are probably going to explode at the open, these stocks have the least chance of fading when the Dubai buzz wears off.
I had planned on adding some January positions tonight but it is suicide to add a lot of new plays on a monster opening spike. We have been bitten by the gap and crap bug several times recently. For tonight I am going minimize the January entries along with the S&P additions and we will look for a dip to add some more January plays.
Palm reports earnings on Thursday so I would like to be out of that position by Wednesday's close. We have the $10 put and PALM is flirting with $12 so we should be able to close it for a nickel this week. Place a buy to close order on the Dec-$10 put for a nickel.
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(V) Visa $81.27 close, $84.10 after hours.
Visa Inc. (Visa) operates the retail electronic payments network and manages a global payments brand. It facilitates global commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses and government entities. Visa provides financial institutions with product platforms encompassing consumer credit, debit, prepaid and commercial payments.
S&P announced on Friday Visa will be added to the S&P-500 as of next Friday's close. Visa spiked to $84 in after hours and I think it will go higher. The two strikes available are the $80 and $85. The December $80 strike is going to deflate to nothing at Monday's open. If we sell the $85 strike we should be able to get something in the $1.50 range for a 4-day play.
SELL Dec $85 PUT V-XQ Closed $3.70x$3.85 on Friday. Stop Loss Visa at $83.
Chart of Visa
(CLF) Cliffs Natural Resources $43.14 close, $44.20 after hours.
Cliffs Natural Resources Inc. (Cliffs), formerly Cleveland-Cliffs Inc, is an international mining and natural resources company. The Company is a producer of iron ore pellets in North America, a supplier of direct-shipping lump and fines iron ore out of Australia, and a producer of metallurgical coal. Cliffs is organized according to product category and geographic location: North American Iron Ore, North American Coal, Asia Pacific Iron Ore, Asia Pacific Coal and Latin American Iron Ore. In North America, it operates six iron ore mines in Michigan, Minnesota and Eastern Canada, and two coking coal-mining complexes located in West Virginia and Alabama. Its Asia Pacific operations include full ownership of Portman, which is comprised of two iron ore mining complexes in Western Australia, serving the Asian iron ore markets with direct-shipping fines and lump ore, and a 45 % economic interest in Sonoma, a coking and thermal coal mine located in Queensland, Australia.
S&P announced on Friday Cliffs will be added to the S&P-500 as of next Friday's close. CLF spiked to $44 in after hours and I think it will go higher. There are $1 strikes available are the $44 at the money strike is my recommendation. If we sell the $44 strike we should be able to get something in the $1.00 range for a 4-day play.
SELL Dec $44 PUT CGJ-XF Closed $1.50x$1.65 on Friday. Stop Loss CLF at $42.75.
Chart of CLF
(STLD) Steel Dynamics $18.23
Steel Dynamics, Inc. is a steel producer and metals recycler. The Company has three segments: steel operations, steel fabrication operations, and metals recycling and ferrous resources operations. The Company's products in its steel segment include hot rolled, cold rolled, galvanized, Galvalume and painted sheet steel; various structural steel beams and rails; special bar quality steel, and various merchant steel products, including beams, angles, flats and channels. Its products in the metals recycling segment include ferrous and nonferrous scrap processing, scrap management, transportation, and brokerage and trading products and services.
STLD is breaking out over prior resistance at $18 and the positive economic news both here and in China suggests business should be picking up. The CEO recently said that orders for steel had recently increased and pricing has improved. This helped more STLD out of the dumps and into potential breakout mode.
SELL Jan $17.50 PUT RQL-MS Closed $.70x$.75 on Friday. Stop Loss STLD at $17.75.
Chart of STLD
(MXB) MCSI Inc $33.00
MSCI Inc. (MSCI) is a provider of investment decision support tools, including indices and portfolio risk and performance analytics for use by institutions in managing equity, fixed income and multi-asset class portfolios. The Companyâ€™s principal products are its international equity indices marketed under the MSCI brand and its equity portfolio analytics marketed under the Barra brand. Its products are used in many areas of the investment process, including portfolio construction and optimization, performance benchmarking and attribution, risk management and analysis, index-linked investment product creation, asset allocation, investment manager selection and investment research. The Companyâ€™s primary products consist of equity indices, equity portfolio analytics and multi-asset class portfolio analytics. As of November 30, 2008, the Company had over 3,100 clients across 64 countries.
MXB is breaking out over prior resistance at $32+ and could hit $35 quickly in the right market. MXB recently prices nearly 4 million new shares at $30.85 to coincide with their addition to the S&P Midcap index. It was sucked up immediately and after a brief post offering dip it appears to be off to the races again.
This will be a little more risky then other plays because I am recommending a strike $2 in the money.
SELL Jan $35 PUT MXB-MG Closed $2.55 on Friday. Stop Loss MXB @ at $32.25.
Chart of MXB
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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)