After a nice rebound to resistance on Friday is it time to roll the dice and gamble that the rally will continue or should we wait another 24 hours to see how the market behaves?
That sentence above is the $64 question. The markets (Dow, S&P, Nasdaq) halted their rally on Friday exactly at Fib resistance points. The path of least resistance (no pun intended) would be a dip. However the Russell blew through its equivalent resistance to post the biggest percentage gain for the day. That suggests the markets could move higher on Monday.
Unfortunately the Middle East situation is getting worse. We now have new demonstrations in Oman and the new prime minister in Yemen was forced to resign by demonstrators over the weekend with five killed. The Saudi "day of rage" on March 11th is gaining supporters again and we could be heading into another volatile week.
On the U.S. front we have a flurry of economic reports that should provide a boost to the market, assuming traders are not glued to the Middle East news.
I would pass on adding any new plays today except for one reason. "IF" we do get a continued rally it could be explosive. If the bad news bulls decide to ignore Libya and buy stocks we could see a serious rally develop as cautious investors chase stocks higher.
It is a tough call and we already have two decent positions on the SPY and IWM to capture any upward movement.
After watching the S&P futures decline by -6 points and then cut that loss by more than half I decided to add a couple positions. If the market opens down we will not get an entry but should it open higher we will be ready to go.
Current Position Changes
MOS - Mosaic $84.89 (Short Put)
Mosaic crashed back to $75.40 last week on profit taking and then charged off late in the week to close at $84.89. That volatility added plenty of premium and I am going to recommend the April $75 put at $10 out of the money.
Do not enter this position unless MOS and the S&P-500 are positive.
Sell Short MOS April $75 Put, currently $1.72, stop loss $80.50
Chart of MOS
CMI - Cummins Inc $102.35 (Short Put)
Cummins has been very strong during the commodity rally. Last week's profit taking knocked $14 off CMI before the rebound began. That also added volatility to the CMI options. With CMI at $102 we can sell the $95 put for $2.65. If the market does not continue its correction CMI should extend its rebound. Business is booming and this is a quality stock without a lot of normal volatility.
Do not enter this position unless CMI and the S&P-500 are positive.
Sell Short April CMI $95 Put, currently $2.65, stop loss $99.25
Chart of CMI
New Long Term Recommendations
New Aggressive Recommendations
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)