Option Selling Tuesday – INTC, MSFT, MS

After my April options on Intel (INTC) expired worthless I planned to get right back in. I think INTC has a strong run left in it. With a forward P/E ratio of only 12.22 INTC has room for error without getting crushed. As the economy continues to expand I see INTC as a leader along the way. While INTC was trading at $24.20 this morning I sold three INTC June 24 naked puts at $0.85 each and received $253.61 after commissions.  I sold close to the money strikes to help my premiums, but also because I consider the downside risk to be fairly low.  If the broader markets stop their bull run for a breather I expect it to be short and probably shallow.  INTC with its large cash position and market dominating position should be considered a safe hideout if fear truly hit.  I only sold three options because I’m running out of money.

While I was in that thought process of why I liked INTC I decided Microsoft (MSFT) fit the same bill.  While MSFT was trading at $31.15 I sold two MSFT June 31 naked puts at $1.05 each and received $208.57after commissions.  MSFT’s forward P/E is only $13.96 and like INTC has room for a mistake.  MSFT has a lot going for it if the economy’s return ever ends up including jobs.  Once companies start adding employs then INTC and MSFT will be huge beneficiaries as the hardware and software demands of companies increases.  I didn’t have any technology exposure before today, so I was overdue to add something.  I thought about going with QQQQ, but decided I could do better with these two individual stock picks.  I’d love to get into AAPL again, but don’t want to without using options and to do that I’d have to risk more than 20% of my portfolio in one stock which I’m not willing to do.

After those two trades near the opening of the day I took a break and checked my performance in Quicken compared to what the major indices have been doing this year.  To my surprise I was trailing again.  That got me back into my trading seat fairly quickly.  I had been planning to add another leg onto my JPM position and now that it dipped I thought it might be a worthwhile move today, but before I pulled the trigger I changed my mind.  I decided to stick with a financial company pick, but thought I should diversify a little.  For that I went to Morgan Stanley (MS).  While MS was trading at $30.14 I sold two one MS June 29 naked put at $1.11 each and received $220.57 $110.28 after commissions.  [4/21/10 EDIT: I had to edit this post because I screwed up.  I did sell two puts, but I messed up the order with IB and sold the options as part of a group trade which forced one of the options to go to my IRA account and only one to this taxable account.  MS is up this morning and I’m not chasing it yet, so my position stands at one naked put on MS.]  MS has a forward P/E of only 9.0 which isn’t far from Goldman (GS), but without the lawsuit.  I decided to sell an extra dollar out of the money for two reasons.  First is that I’m now starting to write options without having the money to back it and wanted the extra cushion.  Second, when MS dropped on Friday it fell below $29.00.  If other similar news hits the wires I expect MS to dip with it, but hold support around that same area. 

Selling these three options today brings my scheduled run rate up above a 17% annualized gain if they all work out.  The way the markets have been behaving I’ll have to keep chasing hard to stay within reach though.  As my holding contin

ue to move farther out of the money I’ll continue to extend myself a little farther each week.  We still have four and half weeks before May options expiration, so I’ll have plenty of time to add more risk and might consider closing a couple of options before expiration if they get cheap enough.  I usually let them sit close to worthless until expiration, but this time around I might take the risk off the table as I add replacement positions.