Market negative, but fear factor rising
After last week’s market sell-off, it comes as no surprise that the market trend picture is now negative for most indices and sectors. Fear and panic are back on the rise, however, so some more bad news and further declines in the coming days/weeks will likely set the stage for another bounce.
New positions
Citigroup (C) – Last Monday I sold some November 35-strike puts on C as the stock dropped after the company announced further markdowns due to subprime exposure:
The short- and intermediate-term trend is clearly down, and the stock is extremely oversold. Support might be expected in the 30 – 32 area.
Limited Brands (LTD) – Last Friday I sold some December 17.5-strike puts on LTD as the stock fell with the rest of the retail sector on news of disappointing October retail sales:
The short- and intermediate-term trend for LTD is clearly down and the stock appears headed to test support in the 17 – 18 area. A break below those levels may see major support tested at the 15 – 16 level. Like the financial sector (see the Citigroup position above), the retail sector looks like its beginning to offer some reasonable value opportunities.
Watchlists
“Upside strength” candidates of interest this week include AGCO (AG), Archer Daniels Midland (ADM), Church & Dwight (CHD), DIRECTV Group (DTV), Emerson Electric (EMR), Northrup Grumman (NOC), Parker Hannifin (PH), Protective Life (PL), Terra Industries (TRA), and UnitedHealth Group (UNH).
Candidates of interest on the “oversold” scans include 3M (MMM), Caterpillar (CAT), Corn Products International (CPO), Fastenal (FAST), Gannett (GCI), Limited Brands (LTD), MSC Industrial Direct (MSM), Nordstrom (JWN), Kohl’s (KSS), Pfizer (PFE), Quanex (NX), Rohm & Haas (ROH), Sanderson Farms (SAFM), Timken Company (TKR), United Parcel Service (UPS), Waste Management (WMI), and Xilinx (XLNX).
Dear Sir,
Wondering about your Citigroup PUT sale.
With 35P, and support around 15% lower, was the premium large enought to cover the expected loss, or were you hedging on the bounc before or ?
Just wondering, if I have looked at this particular transaction to simplistc ?
thank you for continued posts..
Kind Regards,
F.S.
Regarding my sale of the Citigroup puts, first I wouldn’t say there was an “expected loss.”
The 35 level is/was a support/resistance level, and I placed the limit order to sell puts prior to the opening on the Monday morning following the news of the company’s larger-than-expected writedown and resignation of the CEO.
The stock had closed the preceding Friday at 37+ and was looking to open down significantly. I thought there was a good chance that the stock might open at or near its lows (perhaps around the 35 level) in a climax fashion and then recover from that point. As it turned out I did sell my puts at close to their highs of that day and even though the stock did not recover significantly (portending further weakness) I had plenty of opportunity that day to take some profits on that position if I had wanted to.
Which brings me to another point: I did sell the puts for a significant premium (their implied volatility was extremely high), and they were still out of the money (at the time) with only ten days remaining until expiration. In addition, the stock was extremely oversold and there appeared to be some panic selling taking place – all signs pointing to a potential near-term bottom.
In addition to the above, I wouldn’t mind owning the stock at around these levels (my net cost basis will be 33 and change if I end up being put the stock). It would seem reasonable to expect that by now most of the bad news has been priced in (or more than priced in) to the price, offering an opportunity to pick up shares on Citigroup at a reasonable price and with a dividend yield of over 6% to boot.
Overall it’s just a case that I knew what price I was willing to own the stock at (low to mid 30s) and then sold the puts when the opportunity presented itself. Precise timing and price targets weren’t something I was concerned with, or really anything that is needed, as selling puts is a little like using a “blunt instrument” anyway – they allow plenty of room for being “wrong” while still leaving open the significant possibility of ending up being “right.”
I hope this helps answer your questions. Thanks again for your interest.
Dear Sir,
Thank you for the detailed explanation. More thought want into that single trade/play then I surely gave credit. (assumed that is).
I rather like your methodology on this, leverage for a profit from many angles..
Provides some new additions to my thinking process when looking for canidates.
Thank you for sharing your thoughts/comments and continued posts..
P.S. I’m still not “in the market” yet, but trying to paper trade, but its not working well.. Soon I hope… Your blog continues to be my single inspiration to get there!
Yes, there are several different levels at play here, but I think the key is that I’m only focusing on stocks I wouldn’t mind owning and then go from there. In some cases I find myself almost hoping I get put the stock. Partly because that creates the possibility of potentially making more than just the original put sale, but also because at times – especially during strong market rallies – I find myself “underinvested.”
Maintaining a high turnover of selling puts in such an environment isn’t always easy, and having a few stocks on hand that offer the potential for some covered-call selling opportunities can come in handy. (Of course I try to follow the risk management strategies I’ve mentioned in earlier posts – i.e, by diversifying among sectors, limiting position sizes, and trying to buy at reasonable (or better) valuations.)
I hope this gives some added insight into my particular approach.
Dear Sir,
Thank you for confirmation of my assumptions and additional comments on your approach.
The additional comments are very helpfully, beucase my paper trades (via simualtion with live feed) seem to confirm this as well.
Personnaly I think I have approached this as to much of a “ring the register” each month, rather then a balance of hardwork and active management..
Thanks again for your continued posts..
Best Regards,
F.S.
I would say the main idea behind this approach is definitely to be able to “ring the register” each month, but as you note, in order to do so requires maintaining a consistent level of involvement in the market and at the same time staying alert to opportunities. It’s not about timing tops and bottoms and then jumping either “all in” or “all out,” but instead more like trying to continually navigate as smoothly (and profitably) as possible through the market’s inevitable ups and downs.
I’m glad my comments were helpful. Good luck with your continued research.