Ben Bernanke dangled a carrot in front of the market on Friday when he extended the September FOMC meeting to two days in order to "fully explore" Fed options.
The Bernanke speech was not that much different from the one in August of 2010 that produced a six month rally. In the paragraph that counted the most he almost repeated the action sentence from 2010 word for word.
2010: "The Committee will certainly use its tools as needed to maintain price stability."
2011: "The Federal Reserve will certainly do all that it can to help restore high rates of growth and employment in a context of price stability."
He also dropped explained he had extended the September FOMC meeting to two days.
"We will continue to consider other pertinent issues, including of course economic and financial developments, at our meeting in September, which has been scheduled for two days (the 20th and the 21st) instead of one to allow a fuller discussion. The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability."
I believe this two-day carrot will keep the markets from collapsing under their own weight. HOWEVER, we still have the problem of the sovereign debt crisis in Europe. That could and probably will come back haunt us on a regular basis so there is no guarantee the markets will continue higher.
To combat this expected short-term volatility I am going to add a couple longer term plays.
Current Position Changes
New Short Put Recommendations
COG - Cabot Oil & Gas (Short Put)
Cabot has one of the best charts in the energy sector. They avoided the dramatic drop seen by the majority of companies and they are within $4 of breaking out to a new closing high. Cabot is often mentioned as an acquisition target because of their large acreage positions in the high profile shale plays. At $8 billion market cap they are pocket change for any major company wanting to increase exposure. Exxon is said to be looking for just such a candidate.
They are increasing production dramatically and have excellent management. I am picking an October option to allow us to sell a lower strike but still have a decent premium.
Sell short COG OCT $60 Put, currently $2.20, stop loss $64.75
Chart of COG
New Covered Call Recommendations
New Long Term Recommendations
DRC - Dresser Rand - $37.51 (Short Put)
After the close on Friday Dresser Rand announced a $150 million accelerated stock buyback program, which equates to 5% of its outstanding stock. The majority of the stock will be repurchased in the market in conjunction with Goldman Sachs by August 31st.
The company said it was undertaking the program because the sharp drop in the share price made it particularly attractive, the cash was available on the balance sheet and current and expected equipment orders were likely to exceed prior guidance.
This should produce a decent short-term bounce in the stock price as 5% of the shares are withdrawn from the market. The "better than expected" guidance should keep it moving higher. I am going to recommend we sell the December $40 put, currently $5.20. I would have used a shorter strike but the September $40 is bid $2.60, ask $5.60. A $3 spread is ridiculous.
Dresser was beaten severely by the crash in oil prices and has strong support at $35.
Sell Short Dec $40 Put, currently $5.20, stop loss $34.75
Chart of Dresser Rand
WLT - Walter Energy - $79.04 (Short Put)
Walter is a coal company primarily selling metallurgical coal for the steel industry in the USA. They also produce steam coal and other related products. Walter declined $60 in early August when they missed earnings due to an acquisition and a weather related decline in production from their new properties in Canada. This problem was a one-time event and they are starting to rally from support at $70. This stock is basically on sale at 50% off so once the broader market finds some traction Walter should be a leader in the energy sector.
Sell short Dec $60 Put, currently $4.25, stop loss $69.50
Chart of Walter Energy - Daily
Chart of Walter Energy - 60 Min
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)