Slipping into something more negative
This week’s trend analysis shows all the market indices edging clearly into negative territory. While the longer-term trend periods remain mostly a weak positive (green), the negative (red) short- and intermediate-term trends now dominate.
Although the market has pulled back over the last several weeks, the potential downside risk here still seems significant. As a result, I’m continuing to maintain a more selective and cautious approach to initiating any new positions.
For example, this past week I sold some September 80 puts on Schlumberger (SLB) – currently one of the strongest performing stocks that I follow. However, if in the near term the stock rallies significantly from these levels I won’t overstay my welcome.
Late Friday I also sold some September 27.5 puts on Merck (MRK) during the selling frenzy following news of the first Vioxx case judgment. I’ve been waiting for an opportunity in the pharmaceuticals, and with the stock near long-term support at the 25-27 level and a dividend that’s probably reasonably safe (at least for now), I felt comfortable initiating a modest partial position.
Last week was of course also options expirations week, and I went into it short puts on Anheuser Busch (BUD) and International Rectifier (IRF), and short covered calls against shares of Time Warner (TWX) and Weyerhaeuser (WY). BUD closed about half a point in the money, and as a result I’ve been assigned the shares and will be looking to sell calls against them.
IRF conveniently rallied late in the week to close well above the 45 strike price of the puts I was short, so they expired worthless, resulting in a nice return of 3% in three weeks. As always, the return on this “cash secured” put sale was based on the premium received from the sale of the options against the unmargined capital set aside to pay for the possible assignment of the respective stock(s).
WY closed just below the 65 strike price of the calls I had sold on it, leaving me not only with the shares, but also with a nice premium from the call options sale as well. Given my cautious overall outlook, I’ll probably immediately sell some in-the-money 60 calls against the shares, or sell the shares outright.
Finally, the covered calls I’d sold against my TWX shares closed well in the money, and the stock was called away. Overall, this resulted in a 4%+ net return in the two months since I originally sold puts on TWX last June 23.
