All systems go?
Last week saw the large-cap blue chips decisively reverse their previous week’s nosedive and follow the tech stocks higher. In fact, by the close of trading on Tuesday it was clear that the overall market was resolving to the upside. It’s no surprise then that the current weekly trend analysis is now positive on all of the major indices.
How high the market may go from here is anybody’s guess. From my perspective as a seller of put options it doesn’t really matter, as long as the trend remains neutral/positive. For now at least the trend is pointing up, and I’ll be more aggressive about looking for put-selling opportunities.
Last week of course was also options expiration week, and I went into it short May puts on ChevronTexaco (CVX), Dow Chemical (DOW), DuPont (DD), Nucor (NUE), Union Pacific (UNP), Verizon (VZ), and Weyerhaeuser (WY). At the start of the week, five of the seven stocks were trading below their respective strike prices.
By Friday, however, only WY and DD – which, like other basic resources stocks were underperforming the market – were still trading in the money, but only fractionally. After some deliberation I decided to buy back the WY puts (at 25% of what I had originally sold them for) rather than chance being assigned the stock. As it turned out I needn’t have bothered, as WY closed at 64.97 – only 0.03 points in the money.
However, I was assigned the DuPont shares, as DD closed 1/2 point in the money below the 47-1/2 strike price of the puts I had sold on it. In retrospect, I probably should have bought these back too. The stock is currently one of the few that’s still negative on the trend analysis, and I could have bought back the puts at a net breakeven. If it breaks down it could easily fall to the 42 to 43 level, at which point I’ll have become an investor. 
All of the puts I’d sold on the other stocks expired worthless – an ideal scenario. The overall result was a net return of about 1.6% on the capital set aside to pay for the possible assignment of the stocks on which these ‘cash-secured’ puts had been sold. Since the options were sold anywhere from 2 to 6 weeks earlier, this translates to an average annualized return in the neighborhood of 15% – even higher if margin is used.
Now it’s on to the next options cycle. A pullback after last week’s rally wouldn’t be unexpected, and I would view it as an opportunity to begin selling June puts on stocks on my watchlist. A few more that I added this past week include BellSouth (BLS), Coca Cola (KO), KeyCorp (KEY), SBC Communications (SBC), Vodafone (VOD), Wells Fargo (WFC), and Whirlpool (WHR).
