Retest of May’s highs ahead?
Tech stocks finally kicked into gear last week, rallying along with most of the rest of the market to end the week right at or near important upside resistance levels. While the market might be expected to consolidate here, the nature of the rally so far and the now decisively positive weekly trend picture suggest that this up move has further to go.
If so, then that further suggests that a retest of the May market highs is likely – at least for the DJIA and the S&P 500. So, for now, I’m giving the bulls the benefit of the doubt. At the same time, however, I’m keeping in mind the distinct possibility that this rally from the July lows may turn out to be the prelude to another leg down in a larger-scale downtrend or correction.
Options Expiration Results
- Abbott Labs (ABT) – The August 45 calls I sold on 7/21 against my long position in ABT expired in the money (ITM), and the stock was called, for a four-month net return of about 8.7%, which includes a dividend payment.
- Bristol Myers Squibb (BMY) – The August 25 calls I sold on 7/19 against my long position in BMY expired out of the money (OTM), for a four-week net return of about 4.7% on that position. The stock has since dropped on concerns over the company’s potential loss of patent protection on its blood thinner drug Plavix, and a court ruling on this is due this week. I’m going to be watching this closely and play it by ear, but my inclination is to either exit the position or hedge it substantially.
- Dow Chemical (DOW) – The August 35 puts I sold on 7/27 expired OTM, for a three-week net return of 4.3%.* I’ll be looking to sell puts again on another pullback.
- Merck (MRK) – See new positions (below).
- Molson Coors (TAP) – The August 70 calls I sold on 7/28 against my long position in TAP expired OTM for a three-week net return of 4%.
- Unilever (UN) – The August 23.375 calls I sold on 7/20 against my long position in UN expired OTM for a four-week net return of 2.5%.
- UST, Inc. (UST) – The August 50 calls I sold on 7/19 against my long position in UST expired ITM, and the stock was called, for a three-month net return of about 19%, which includes a dividend payment. This does not include the intraday gain of 3% made on this position when I sold and bought back some July 45 calls on 7/6.
New positions
Merck (MRK) – Last Thursday I sold some August 40 puts on MRK as the stock sold off after the company lost another Vioxx-related lawsuit. I was too early, as this was soon followed by news of yet another loss and the stock sold off more sharply:
Although it recovered well, it still ended the week below 40 and I was put the stock for a net cost basis of about 39.55. The stock has been a strong performer recently and is probably due for a pullback, but it does look as if it can go higher on the intermediate term (with upside resistance at the 43-44 level). In any case, as always I’m perfectly comfortable owning the stocks I sell puts on, and in this case an added appeal to owning the shares now is the upcoming dividend payment (ex-date of 8/30).
Watchlist
New stocks of interest showing up on my “upside strength” scans this week include Avery Dennison (AVY), BB&T Corp. (BBT), CarMax (KMX), Koninklijke Philips Electronics (PHG), Lubrizol (LZ), McDonalds (MCD), Paccar (PCAR), and Verizon (VZ). (Note: I currently own some shares of VZ.)
Still lots of “oversold” candidates to choose from this week. In addition to many of those already noted in recent weeks, new ones of interest include Furniture Brands (FBN), Ingersoll-Rand (IR), Ross Stores (ROST), and SK Telecom (SKM).
* 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.
