Sell-off: Much ado about … ?
Despite all of the hoopla surrounding last week’s sell-off, the latest trend analysis of the major market indices reflects only a mixed – although clearly weakened – picture. In fact, while the trend pictures of the NASDAQ, S&P500, and (especially) the Dow Jones Industrials are indicating short- and/or intermediate-term weakness, the trend spectrum of the broader Russell 2000 – which reached a new all-time high just last Thursday – remains almost completely positive.
Next week’s action should help clarify whether this is a consolidation of the current intermediate-term uptrend, or the beginning of a new downtrend. In any case, I’m looking forward to having the opportunity to sell puts on many of the stocks on my watchlist at more favorable (lower) levels. Such opportunities have recently been few and far between.
In the meantime, I went into last week’s options expiration short 35-strike puts on Frontline (FRO), 17 1/2-strike puts on General Motors (GM), 25-strike puts on Lear Corp. (LEA), and 30-strike puts on Tribune (TRB). As expected I was put the shares of LEA (for a net purchase price of about 24.60). The other options expired out of the money for net returns of 0.6% (FRO), 2.4% (GM), and 1.4% (TRB), all within a time period of about four weeks or less.*
Last week I also initiated two new positions: On Wednesday I sold some February 22 1/2 puts on Pfizer (PFE) when my limit order was triggered during pre-earnings-announcement jitters, and late Friday I sold some February 45 puts on Citigroup (C), after it sold off sharply following a “lackluster” earnings report.
In addition, a number of other stocks on my watchlist have recently been falling back toward put-selling target areas and are again attracting my interest. These include Allstate (ALL), Anheuser Busch (BUD), Cendant (CD), and Ford (F), among others.
*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.
