The window dressers survived another day and were able to revive the indexes from their opening drop. With four hours left in 2010 their work is almost over.
We had a successful morning despite the market drop. We were able to exit all but one position with a profit. Hornbeck Offshore cost us a nickel to exit.
The total profit for December was just over $9. If you traded one contract of everything you made $900 less commissions. Five contracts $4500, etc. This is a mathematical exercise only because I know everyone did not trade every position. Let's hope your crystal ball was better than mine and you took all the winners and avoided all the losers.
Considering that December was not a trending market until the last week I am very happy with the results. If you remember we traded in a range for six weeks with alternating spikes and drops as is common with a topping or consolidating process. In a trending market we should do significantly better.
I have written a lot lately that I expect a dip to begin sometime next week. A couple weeks ago I wrote that the markets should make a new intraday high the week of the 4th and then take profits. We saw a new high on Tuesday and we may or may not surpass that next week on the strength of 401K money hitting the market. Regardless I still believe we will see a dip.
Because of my beliefs I am willing to short some calls, or buy puts, on some of the high flyers I believe will crash and burn. Because this is the option "writer" newsletter I will profile some calls to write next week. For those who don't have the account size or permissions to write naked calls I will also profile some puts to buy.
I was going to profile them for an entry on Monday but decided to start the list tonight. We never know when the drop might begin so it would not hurt to have a couple in the hopper when the market opens on Monday. God forbid we see another terrorist attack this weekend but that is always a possibility. Remember the bomb scare in Times Square on Thursday.
Take out some terrorist insurance on Thursday and I will have some more plays on Sunday evening.
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NO OPEN POSITIONS
I am foregoing the normal description of the company and just listing the plays.
TSL - Trina Solar $53.62 - Short Call - Long Put
Trina has gained nearly 1000% since March when it traded at $5.75. Anyone long this stock on that big run has plenty of profits to capture. The stall at $56 last week suggests the window dressers were having trouble pushing it higher.
Sell Short Jan $45 Call TSL-AI currently $8.70 ONLY if TSL trades at $52.50
If you can't sell naked calls:
BUY Jan $50 Put TSL-MJ currently $1.20, ONLY if TSL trades at $52.50
EXIT TARGET: Exit the trade if TSL trades at $47
Trina Solar Chart
IOC - Interoil Corp $77.17 - Short Call - Long Put
IOC was trading at $10 last December. That is nearly a 700% gain in one year. Funds should be taking some money off the table once the calendar rolls over. IOC is an energy company in New Guinea, not the U.S., not globally but only in Papua New Guinea. This is the mother of all momentum stocks that is poised to crash in a down market.
I am picking the $60 strike because there is 17,000 open interest compared to 3K to 6K in the other strikes. Plenty of cover in heavy traffic.
Sell Short Jan $60 Call IOC-AL currently $17.10 ONLY if IOC trades at $75.00.
If you can't sell naked calls:
BUY Jan $70 Put IOC-MN currently $1.50, ONLY if IOC trades at $75.00
EXIT TARGET: Exit the trade if IOC trades at $65
Chart of Interoil
DIA - Dow 30 ETF $105.23 Short Call - Long Put
I view this as our terrorist insurance. The strike I am picking is $10 in the money at roughly the equivalent of Dow 9500. There are more than 12,785 contracts in open interest. If an attack occurred at a highly attended event like Times Square I could easily see the Dow decline under 10,000. If no attack occurs I still expect the Dow to decline before the end of next week. This deep in the money we will get a 1:1 benefit of any drop. There is no time premium.
We are going to enter this play on Thursday as insurance against a gap down open on Monday. Futures are trading higher overnight so there is the possibility of another gain on Thursday. The market closes at 1:PM. We want to be in before the close. Pick your entry during the morning. If we get a gap and crap at the open I would enter on the gap failure. If it looks like it will be a positive close then wait until 30 min before the close.
I am going to use the 12:30 price as the official entry point on this play but you are free to enter at the best spot.
Sell Short Jan $95 Call DAV-AQ currently $10.30, stop on DIA at $106.05
If you can't sell naked calls:
BUY Jan $104 Put DIA-MZ currently $.84
EXIT TARGET: No exit target
Chart of DIA
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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)