The markets closed strongly today - well, not the inverse ETFs, chuckle. Today should be confirmation for even the most timid soul (me) that the market is in a new up leg after bouncing off support last week. Actually, today would have been a lovely time to enter covered call and naked put positions. For that matter, Friday would have been, also.

There always is this tension: get in when the market trend is the fattest (close to support), or get in with more confirmation once the rally back up into the trading range has “proven” itself. The former can yield more profits, the latter is somewhat more conservative.

I put on a trade in QQQQ again, both long stock and “other”. The CC trade was a purchase at 43.14; I would have liked to sell the NOV 46C, but the premium was pennies. So I legged in. I will either write calls at a higher level or simply close when an acceptable profit is presented. A 3% (raw) return suffices, but I will, ahem, accept more.

OTM is better, because the calls’ low delta makes an early close possible and very profitable. Getting a 5-10% raw return in doing so is not difficult. An ATM write works well and could be closed early, also, but the higher delta makes it tougher, and the return less. ITM should work well, too. Note that November expiration (21st) likely will come a little before the market and many stocks top out at the upper trend (range) line.

Great time for naked puts, too. Try to write a strike below the 20-MA, or if the stock is not above the 20-MA, below the 50-MA. Leave enough room that a typical (for the stock) wide-ranging day will not stop you out of the trade.

WHAT TO TRADE?

There are stocks that bottomed a little bit ahead of the market, with it and behind it. Those ahead of the market I will not touch, because I want a little more travel left in it. Here are some November trades that I like, all of which I would write either OTM or leg in:

SII Smith International - has broken back above the 50-MA, low premium, leg in
PM Philip Morris - has broken back above 20 and 50-MA, low premium, leg in
CAT Caterpillar - ATM 60, 2.8%, has broken back above 20 and 50-MA
BTU Peabody Energy - ITM 44, 2.9%, has broken back above 20 and 50-MA

There are others. Baker Hughes (BHI) just broke above the 50-MA today, well behind the market, and could also be a good trade in the next day or so. I found these by sorting for MADI, looking for stocks 00:00 or better, then doing a secondary sort for flat return.

These stocks came off our Global Select (Dividends) list, and none of these have earnings coming before expiration on November 21st.

I would set a stop, or mental stop, below the 50-day average - preferably below the lowest late-October close. We don’t want to be stopped out too soon on a wide-ranging day.

Good luck.

This entry was posted on Monday, November 9th, 2009 at 8:44 pm and is filed under Covered Calls, Naked Puts. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.