I’ve considered SPY naked puts, but keep thinking we’ll have a pull back.  That’s kept me out of some investments and put me in a place where I’m starting to trail the markets again.  I feel I’m finally starting to capitulate and accepting more risk.  I still expect a pull back in the markets in the not too distant future and plan to use that opportunity to get heavily invested since I don’t think we’ll have a ferocious fall for a while still.

I mentioned a couple of weeks ago that I had a limit order in place for Itron Inc (ITRI).  That order never hit and I didn’t try to chase it higher as it continued to rally from the Barron’s article that touted it.  ITRI finally started to lose some steam about a week later and I waited to see when this new slight dip might find footing.  Yesterday seemed to offer some support and once again I missed my limit order to open my position as I pushed for a little more than the market was willing to give.  This morning I became more flexible with my order and while ITRI was trading at $70.05 I sold one ITRI May 70 naked put at $3.80 and received $378.99 after commissions.  I went with an at the money trade here because I only sold one contract and am considering ITRI as a long term hold if this option is assigned.  If it dips I’ll consider adding one more option at the $65 strike, if not lower. I actually started off with a limit order for two contracts at the $65 strike, but by the time today rolled around I didn’t think those premiums were worth the risk of a position that would be worth more than 10% of my account.  This is my first May 2010 expiration position.  I don’t like to go that far out, but as I mentioned at the beginning of this post, I need more exposure and I like ITRI long term.

I missed my opportunity to open up a position on AT&T (T) while it dipped under $25 recently and decided not to continue to stay on the sidelines without getting some exposure to it, even while it’s off its lows already.  A big threat could come from the loss of their (or I could say “our” since I’m on contract at T currently) monopoly on the iPhone service, but I’m in the camp that if Verizon gets a piece of that action everyone won’t ditch T.  The rollover minutes plan is hard to pass up and aside from NY I believe most areas don’t seem to have data problems (at least according the rumors started by T marketing efforts).  I can personally attest to Atlanta being a solid area.  T’s P/E ratio is half that of Verizon’s and T’s dividend yield of 6.5% is a real draw too.  Taking all of this into consideration I decided to sell some naked puts slightly in the money based on the idea that I won’t mind having the shares assigned and earning the dividend as I sell covered calls on it.  While T was trading at $25.91 I sold three T April 26 naked puts at $0.072 each and received $214.63 after commissions.  This trade added to my pile of options expiring in April which was high on my to do list for this week.  After this week I’ll probably move most of my focus to May expiration to try to take in bigger premiums on each trade.

Most of the stocks on this list came from articles I’ve read on other sites and Barron’s newspaper.  This screen shot is from my IB account and actually came from last week when I first started putting this post together and then I got distracted with making some trades. 

The obvious benefit from selling options on dividend paying stocks is that you get an extra payment built in to your planned gains when you are long the stock.  You don’t get that benefit when your only exposure is through naked puts.  Dividend stocks can give a little more support in a down market if it is believed the dividends will remain untouched or continue to grow.  I don’t pay as much attention to the ex-dividend date when selling options as some traders do.  I figure if I’m looking out more than a few months worth of holding one of these stocks then the dividend will roll around for me again soon enough.  If I’ve identified a good entry point then I’m comfortable with the trade without the dividend.  If I’m assigned the stock then I consider the dividend a bonus on top of my option premiums.

AFL and KFT are the only stocks on this list I have options on right now and both are scheduled to finish out of the money in three days.  I’ll be adding new ones.  Let me know of some I’m missing.  I recognize I am missing some gems since this is such a young list.  I’ll collect all that you give me and will continue to add new ones through my own research and update this list with a new post every so often.  Thanks for your input.

I decided to go with a monthly chart this weekend after having an email conversation with a reader who had a question about the 200 month moving average from a chart I posted last July.  Back then the SPX was fighting to get back above its 200 month moving average.  This week was pretty good timing to come back to look at the past five years of monthly prices because the 10, 100 and 200 month moving averages really stand out.

For the past six months the SPX has been sandwiched between the 100 and 200 month moving averages.  Friday’s intraday high marked a new 2010 high, but the resistance from the 100 month moving average could prove to be a rally stopper.  This level, near 1,150, is going to be crucial to watch.  I’m not saying the SPX can’t get above this range, but before you jump in with both feet it might be worth waiting for more than just a few confirmation days.  A move above 1,200 would be enough to turn me more bullish, but I wouldn’t be surprised to see another move back down to the 200 month moving average (around 1,050) again before that happens. 

A drop back down to the 200 month moving average would be approximately an 8.5% drop for the SPX which is more than we’ve been accustomed to for the past year on dips, but isn’t out of the question after a year of rallying without a full 10% correction mixed in.  If the S&P 500 starts to drop it could find support at the 10 month moving average again, just as it did in February when the index found support at both the 10 and 200 month moving averages around the same level.

I only drew one trend line in this chart.  It was the trend of lower highs, but broke for the SPX to move sideways a few months ago.  That same line acted as support last month and could come into play again as potential support as a trend line of lower lows.  That might be asking a bit much from this line, but I didn’t see many other trend lines worth discussing.

The Williams %R indicator is definitely worth watching for the monthly view.  You can see (especially on the 28 month indicator) how %R issued a sell signal when it dropped below overbought at the end of 2007.  More than a year later in the spring of 2009 %R moved out of oversold and those paying attention knew to get in again.

Next week is triple expiration for options.  Sometimes that can make for an interesting week of trading.  Throw in the resistance from the 100 month moving average and it becomes pretty exciting.  I think we have a long way to go before the bigger bull run ends, but I expect some decent dips to hit along the way and possibly sooner than later.

While UCO was trading at $13.03 this morning my limit order hit and I bought to open 10 UCO October 12 puts at $1.70 each and paid $1,707.14 with commissions.  Originally I was trying to get my limit order to hit for a $1.15 debit for the combined order, but it only looked like $1.20 would work and I didn’t want to go that high.  By the time this first leg of my option spread hit the prices for the second leg had dropped and the best I could get for a market order would be a $1.25 spread.  I decided to go with a limit order to target a $1.20 spread.  Yes, now I was hoping to get the $1.20 spread I was trying to do better than earlier.  UCO was just toying with me and mocking me for not selling the $1.20 spread four days earlier when I had the chance.  I let my order sit for an hour and started to consider lowering the price to make sure I didn’t get stuck missing out on reducing my overall cost by as much.  The bid/ask was $0.45/0.50 with 177 trades for the day, all at $0.50.  Every once in a while a few more would trade and I could see from the market depth that eventually mine would probably hit if UCO stayed flat.  I figured I’d wait until at least 3:00 pm before reducing my price. 

Just after I stepped away for lunch my second leg hit.  Oil took a big step down and my limit hit easily.  While UCO was trading at $12.77 I sold to open 10 April 12 puts at $0.50 and received $492.86 after commissions.  UCO went down as low as $12.44 within a few minutes before catching its footing again and it looks like I could’ve easily sold these puts for $0.60 if not $0.65 each.  I ended up opening the calendar spread for a net $1.20 debit and the piece of mind that UCO didn’t get away from me to the upside.

The most I can lose on this trade is $1,214.28.  April options expiration is in five weeks and once these short puts (the April puts) expire I’ll keep rewriting new puts through October if the shares aren’t assigned.  If UCO finishes below $12 I’ll either roll the puts out a month or take the option assignment and then start selling covered calls.  As long as I’m taking in premiums it doesn’t matter if it’s from calls or puts.  Depending on the price of UCO at each expiration I’ll either sell one or two months out.  Selling one month out will earn higher total premiums, but by taking smaller bites each month.  As long as I keep bringing in an average of $0.20 each month for May through October I’ll break even.  I think UCO will stay between $10-14 for most of this year and more than likely will be between $11-13 most of the time.  If I’m correct about that I should be able to bring in closer to $0.45 each month if not better.  If I bring in $0.45 for six options expiration periods that will be $2,700 (not counting commissions).  I stand to more than double what I’m risking and I consider the probability of losing to be very small.  If this pans out for me even at half of what I expect, you’ll see a lot more of this type of trade from me in the future.

Oh, I’m still short the original three UCO April 12 naked puts I sold on UCO a few weeks ago.  I’m considering those options in a different category since they aren’t part of this trade strategy.  If UCO finishes April option expiration below $12, it will become a long position for me and I’ll work it as I need to.

I started doing this in the mid-90s when I was brokering electronic components.  One of our vendors was All American Semiconductor (Now listed on the pink sheets as SEMIQ.PK).  At the time it wavered between $5 and $10 and moved along with the price of DRAM which we tracked carefully.  I’d try to get in to make $50-$100 with a small trade that I could turn over in a week or less.  A couple of jobs later I worked for a company named COMFORCE (CFS).  Most of the stock was held by the owner who I knew wouldn’t sell and what was left to the market bounced around close to $1.00.  I’d enter limit orders for $1.00 and then as soon as it hit I’d enter another order to sell at $1.10 or $1.15.  I’d make $100-150 per trade and could flip it in a day usually and rarely more than three days.  I stopped messing with them after it dipped to the $0.50 range before coming back up high enough for me to break even on that lot.  A few months later it was worth more than $3.00 and I missed out.  Now it’s back down again.

My play of this time around is SNRV.  A friend of mine has been picking some up for months and thinks they’ll do well.  I think he’s basing it more on hope than anything else.  I missed out on getting any when he first suggested it when it was less than $0.50.  It made it up above $2.50, but has come down since then.  Yesterday I entered a limit order and it hit this morning just after the markets opened.  I bought 1,500 shares for $1.46 and paid $2,197.50 with commissions.  The $1.45 seems to be a descent floor for it, so I simply went a penny above it to make sure I got some on a dip.  I had planned to put in a sell order for around $1.58 immediately which marked the descending trend line of lower highs, but decided to wait a half day to see how it did since I’m still somewhat new to following it.  Instead of capping out in the upper $1.50s like I expected SNRV is currently trading at $1.71.  Just under $1.70 was a regular stopping point for a while and today is likely a fluke.  I should probably get out here, but now I’m curious if I might end up with a little better gain by waiting.  Remember, I’m not recommending this penny stock.  It’s just for fun.  It’s a shorter trip to my keyboard than to Vegas…

The average volume for this one is just over 5,000 shares per day.  In my limited experience with penny stocks I’ve found the thinly traded stocks are easier to bounce in and out of, especially when the bid/ask spread is 10 cents or more.  I can see why people get into penny stocks.  It can be addictive to watch the things.  I can imagine if I had three or four of these going at the same time that I could do alright some days and would think my losses would be made up by the gains on the other ones.  That’s too time-consuming for my schedule right now, but it’s still fun to mess around with occasionally.

I do not plan to document each trade I do with this one since it’s fairly off topic for this blog, but I’ll plan to write up a synopsis of all my trades after I move on.  I thought it deserved one post to kick it off though.  Let me know if you recommend any other penny stocks to watch that are worth $1-2k of a day trade.

CSCO made a steady climb since I added my second leg, but in a reasonable enough fashion that I knew I could manage my position easily enough.  I thought about closing it last week to pocket $100 profit and move on, but thought I had a good chance to make it to expiration without having to close it early.  That’s about the time CSCO started a strong rally.  Today it went up more than $1.00 and I decided that I missed my chance for a profit and had to cut my losses while they were small.  While CSCO was trading at $26.02 I bought to close three CSCO March 25 naked puts at $0.12 and paid $38.14 with commissions.  I thought about stopping with that one trade and leaving the upside exposure since CSCO will likely come off its current high somewhat before staging a stronger rally.  Then I thought better.  Take the loss, don’t be emotional about it and move on.  CSCO had dropped a penny by the time I decided to exit in full and I bought to close three CSCO March 23 naked calls at $3.05 and paid $917.14 with commissions.

I took in $258.86 from selling the calls and $543.86 from selling the puts originally.  After paying out a combined total of $955.28 today I ended with a realized loss of $152.56 for my mistake.  Making the mistake at the beginning wasn’t too irritating to me compared to not closing the position when I had a profit in the hopes of making less than $100 if I waited.  I would’ve waited even longer, but CSCO says they have a huge announcement to make tomorrow and I don’t want to be in the way of the herd if the markets don’t end up selling on the news after today’s big run up.

The bright side of this is that I freed up some more cash to use on other new positions.  This morning I entered a limit order for a UCO calendar put spread, but it hasn’t hit yet.  I’m trying to work an April/October 12 strike spread.  I’ll detail it if/when the order is filled.

In my S&P 500 chart last weekend I wrote that Monday would be a great indicator for how the markets would likely follow through.  Monday was a big day and I proved to be correct in my prediction with how the markets behaved for the rest of the week.  I have a hard time not liking this Dow Jones chart below too.  It has a lot of bullish indicators working in its favor.  The first is that it broke out above its recent trend line of higher lows.  I’d like to see a test on this same trend line I drew with it now acting as support.  If we can get that on Monday or Tuesday I’ll be more confident that it will hold for longer.  Before going too far to the bullish side I want to see that this line holds and Friday wasn’t a fluke.  Adding to the bullish trend line case is the trend line of higher lows that started about a month ago.  A small dip in the Dow could find support early from that line.  A break below it in the near term might be worth a little concern.  Since it’s such a steep line I don’t expect it to hold for too long either way.

Buried within the small lines over the past week you can see that the 10 day moving average provided support throughout the week and even pulled above the 50 day moving average for a bullish crossover after doing the same thing with the 100 day moving average a couple of weeks ago.  The 100 day moving average is still continuing its march to higher ground too which reduces the downside risk a little bit each step higher it climbs.

I point to the Williams %R indicator often and highlighted it again below to show why.  A few weeks ago the 14 and 28 day indicators moved out of the oversold region which is a bullish indicator.  Even if you had waited for the Dow to have a few confirmation days you could have been along for the past 3+% gain in the index over just a few weeks.  %R is up to the overbought range now which is not a bearish sign yet.  Keep an eye on it for when it falls out of this range.  That’ll be the time to get nervous and possibly take some profits.

With all of these bullish indicators in the chart I’m still not a raging bull which is why I am trying to find reasons not to like this chart.  I’m curious how the economy can truly expand without doing more hiring along the way.  I recognize that the payroll numbers were flat when the expectations were for a move higher, but it could be the handicapping of the reports just made us think it wasn’t so bad.  A lot of would-be workers still aren’t employed and are falling off the stats each month.  Housing still sucks too.  Also worth mentioning, today marked the one year anniversary since the markets bottomed intraday.  We’ve been on a one year bull run without a full 10% correction mixed in.  Eventually we’ll get one at least that big and maybe bigger.  Be careful not to get overly aggressive at this stage.  Keep some tricks up your sleeve for when you see a better opportunity for entry.

JPM did me a favor and although it started off high, it came rolled over a little and moved below yesterday afternoon’s prices.  My limit order was for only one April 41 naked put and was still a little too high to hit and I debated lowering it.  Instead I lowered my strike and made the order for two puts.  While JPM was trading at $41.62 I sold two April 40 naked puts at $1.15 each and received $228.57 after commissions.  My thinking is that the $38 range looks like a potential area of support and if that holds true I could risk more cash.  That brought my order to two options instead of one.  I lowered the strike because I was able to reduce my risk by $0.60 per share.  I was planning to take the first option assignment and then double up on it with a new leg at a lower strike if it dipped enough, but with the $40 strike premium only $0.40 less than $41 strike I decided I’d rather have the slightly lower risk for what is still a decent premium.  Now it’s laughable – since I changed my order and it hit JPM kept falling and my first order would’ve hit.  The order I did place could have worked 10 cents higher.

I’m trying to walk that line of not being greedy with my trades and also not being so wimpy that I don’t end up trading when something isn’t a sure thing which they never are.  I feel comfortable adding a little more financial sector exposure since my NDAQ covered calls are now in the money and my AFL naked puts are currently out of the money.  All three could turn against me any day, but my AFL puts expire in two and a half weeks and most of you know I don’t mind staying long NDAQ at this level.  As far as I can remember this is the first trade I’ve ever made on JPM.  We’ll see if it joins the collection of regulars for me throughout the rest of the year.

As I pointed out in my S&P 500 chart a couple of days ago, we got an early technical indicator that it was time to invest heavily again in the short term.  With that in mind I increased my put selling and it has paid off so far.  I had to slow it down the week before options expiration so I could push more of my option expirations to the next month out and now I’m trying to do some more specific stock picking to keep my options weighted close to 50% each for the two forward months.  I’m considering taking my allocation to more than 100% of the cash I have backing the puts on the next dip.  We’ll see what I still think when the time comes.

I’m slightly ahead of the indices for the year to date, but not far enough to do much bragging yet.  I’m still happy to be leading instead of trailing though.  My 12 month trailing numbers are going to look rough compared to the indices for a while still I since I went so heavily into cash during most of 2009 while nearly every sector roared forward.  As 2010 matures and I’m inching higher in my equity allocation I should start to slowly pull away from the indices again.

Here’s exactly how my returns compare to the major indices.

My 1 year return: +27.02%
Year to date (YTD): +0.49%
Annualized returns since 4/8/07 (my blog’s beginning): -11.22%
Deposits for month: $1,500.00 on 2/8/10

According to Morningstar, here’s how I compare to the major indices through 2/26/10, the end of February trading this year:

Dow Jones Return: 1 year +50.59%, YTD -0.47%
S&P 500 Return: 1 year +53.62%, YTD -0.61%
NASDAQ Composite Return: 1 year +62.45%, YTD -1.36%
Russell 2000: 1 year +63.95%, YTD +0.66%
S&P Midcap 400: 1 year +67.00%, YTD +1.83%

The VIX ended the month at 19.50 and the VXN ended at 19.78.  This moves the volatility trackers to the low end of their range for the past two and half years, but still higher than their mid-2000s levels.  There’s really no telling at these levels if they’ll move back into their recent higher range or drop further to return to their past norms.  Premiums aren’t too bad at this level, so if you’re selling puts and calls to enter and exit positions it just means you’re making less now that recently, but the risk of a spike isn’t as concerning because on day zero the volatility doesn’t matter as long as you aren’t over committed to what you can’t afford to buy.