Market top: Are we there yet?
Overbought and with a slight slowing in short-term upward momentum and with upside resistance levels nearby, the market could hardly be blamed if it decided to take a well-deserved breather here. However, all indications still point to an ongoing intermediate-term uptrend, which suggests yet higher prices ahead.
Given the market’s extended condition, I’m not about to get too aggressive on the long side here – in fact, I’ll likely begin selling calls against some of my long stock positions on further strength. But – until the technical signs indicate otherwise – I’ll also continue to view downdrafts as put-selling opportunities (with the usual time frame of next month’s expiration in mind).
Options Expiration Results
- Bristol Myers Squibb (BMY) – My shares of BMY were called away earlier this month when the October 22.5 calls I had sold against the shares were exercised. I’d sold the calls as a protective measure to hedge against a further news-based decline (unnecessarily as it turned out) and ended up about net break even on my overall position.
- Alcoa (AA) – The October 25 puts I sold against AA on 9/25 expired out of the money (OTM) for a 4-week net return of 1.3%.*
- Altria Group (MO) – The October 75 puts I sold against MO on 9/25 expired OTM for a 4-week net return of 1.3%.
- American Axle (AXL) – The October 15 puts I sold against AXL on 9/21 expired OTM for a 4-week net return of 1.6%.
- American International Group (AIG) – The October 65 puts I sold against AIG on 9/22 expired OTM for a 4-week net return of 1.1%.*
- Bank of New York (BK) – The October 35 puts I sold against BK on 10/02 expired in the money (ITM) and I was put the stock, at a net cost basis of about 34.50.
- British Petroleum (BP) – The October 65 puts I sold against BP on 9/07 expired OTM for a 6-week net return of 1.9%.*
- Pentair (PNR) – The October 25 puts I sold against PNR on 9/26 expired OTM for a 4-week net return of 0.9%.*
- Statoil (STO) – The October 22.5 puts I sold against STO on 10/03 expired OTM for a 3-week net return of 2.1%.*
New Positions
Caterpillar (CAT) – I sold some CAT November 60 puts on Friday as the stock fell sharply after the company cut its 2007 earnings forecast:
The stock looks like it could find some support at the 57-59 level, but, if it doesn’t hold there, it might test the next lower support levels of 55 and ~50, respectively. If this happens in the near term, I’ll look to sell some 50-strike-price puts if given the opportunity at a respectable premium. As always, I’m comfortable owning the stock longer term if it’s put to me.
Watchlists
I’m still away from my main computer and unable to run my usual scans, but will resume next week. However, some stocks that have recently (re)caught my interest from a potentially “oversold” point of view (besides CAT) include Briggs & Stratton (BGG), Hershey (HSY), and Washington Mutual (WM).
* As always, the return on these “cash secured” put sales was based on the premium received from the sale of the options (minus commissions) against the unmargined capital set aside to pay for the possible assignment of the stock.
