On the road again: More puts on autos
Last week’s action reaffirmed the market’s positive overall trend picture with the major indices all ending the week within 1% of 52-week highs. While a downdraft might be expected at any time (with this week’s options expiration offering as good an excuse for one as any), unless it were to carry the market below recent lows, I would view it as a buying – or in my case, put-selling – opportunity.
Speaking of which, most of the stocks on my watchlists have rallied with the market, and as a consequence have offered few such opportunities lately. The exceptions this past week were in the auto sector, when I sold November 25 puts on Lear Corp. (LEA) and December 17 1/2 puts on General Motors (GM).
The stocks fell amidst news that GM would need to restate its 2001 earnings, and as some analysts forecast an increased likelihood that the company would ultimately declare bankruptcy. Given the very high implied volatility and high corresponding premium on the GM options, I was very tempted to sell some November 22 1/2 puts, but the stock price was a little too close to that strike price for comfort, even with only a week or so remaining to expiration.
From a long-term technical perspective, GM’s stock price is currently showing a positive divergence on the price chart – in other words, it appears to be losing downside “momentum” as it moves lower, which could be an indication of an approaching bottom. However, continued – or, worse, accelerated – downside action would negate this. If GM’s stock price does continue lower, it might – temporarily at least – expect to find strong support at the ~21, ~18, and ~15 levels, respectively.
On my watchlist of “upside strength” stocks, I’ve added American International Group (AIG), Citigroup (C), United Technologies (UTX), and Waste Management (WMI). On my watchlist of “beaten down” stocks, I’ve added Johnson & Johnson (JNJ) and News Corp. (NWS). And, although they may not quite qualify as “beaten down” (yet), I’m also continuing to watch many oil and energy stocks like Exxon (XOM) and Chevron Texaco (CVX) for opportunities if they continue lower.
