Sometimes the best laid plans fail because the scenario does not play out as expected. That is the case with the current market. The stage was set for a decline late last week but it never appeared.
My scenario for a decline late in the week never worked out. The markets shook off several opening drops to finish the week with decent gains. From all sources I can find most analysts are blaming the rally on stronger than normal year-end cash flows into index funds. Regardless of the reason the markets are simply not going down.
With Intel's earnings next Thursday it is likely any selling will be postponed at least until after Intel and probably until after the 28th and all the banks and major techs will have already reported. That does not mean there won't be volatility in the market but the basic trend should have a positive bias. Once that trend starts to turn it would be a sign a spring correction could be in our future.
I am very leery of trying to write puts into this market without at least a minor dip to take off some of the froth. However, because the dollar appears to be weakening as the market rallies there are some targets that are relatively safer. I am going to add a gold and Russell ETF today.
The futures are up about +5 points for Monday morning. I was going to close the DIA positions but the gap up if this holds will put us right at the stop anyway. On the remote chance that the futures roll over I am leaving the DIA play with the stop at 107.05.
AvalonBay is getting closer to the revised target at $76 and the option is running out of time. I lowered the stop to $81 and will lower it again on Monday evening.
We were stopped on CRR and GDI and escaped GDI with a decent profit. We came within 7-cents of our $40.50 target on GDI before the rebound began. We broke even on CRR thanks to the stop. The spike in oil prices powered all the oil service companies higher.
FCX - Freeport McMoran $88.08 (Short Put)
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). As of December 31, 2008, consolidated recoverable proven and probable reserves totaled 102.0 billion pounds of copper, 40 million ounces of gold, 2.48 billion pounds of molybdenum, 266.6 million ounces of silver and 0.7 billion pounds of cobalt.
If you can't sell naked calls:
The dollar is falling and there are more fears of soverign debt defaults by countries like Greece and Spain. Venezuela devalued their currency on Friday and inflation will appear sooner or later. Gold corrected from its prior spike and appears to be getting ready to take a run at a new high.
Sell Feb $85 Put FHZ-NQ currently $3.10, Stop at FCX $85.
Chart of FCX
IWM - $64.53 - Russell 2000 ETF (short put)
The iShares Russell 2000 Index Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the small capitalization sector of the U.S. equity market as represented by the Russell 2000 Index.
The Russell broke out to a new high on buying from index funds. It appears the shorts are getting squeezed and should the market correct over the next couple days we have the long put on the DIA as insurance.
Sell Short Feb $62 PUT DIW-NJ currently $1.06, Stop IWM at $63
Chart of IWM
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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)