Market Action

I won’t retrace my recent posts on the market retracement. But it would seem the correction is over. I would have preferred a little more of a correction, personally, but it is what it is. Even in these flaky economic times, the market tends to follow the rules. Today’s action was not spectacular. The INDU gained 43.4, the SPX 3.5 and the NDX 8.8 points. The Russell 2000 outperformed them all, a good bullish sign in my view.

Well, now what?

Now is a good time to write OTM calls or puts on great stocks, like those on CallWriter’s Global Select lists, providing they also are recovering along with the market. Why OTM? Well why not? The only justification for an OTM buy-write covered call is that you are short-term bullish. After all, you are getting less premium and less downside protection. Ah, but if the stock moves up you can close the trade early for a profit or let the trade be assigned at a nice profit.

This works just as well for naked puts, although the low delta means the put is slow to lose value and give you an early close unless the stock really moves. If really emboldened, consider a put very near the money. Though probably posing more of a risk - at least statistically - of assignment than OTM puts, they are more profitable.

In both cases, CallWriter members should use the Industry Rank link in our Research Page to look at the stock’s industry to make sure peer stocks are recovering along with your stock.

There isn’t much February premium out there, so look at March and beware of earnings reports.

Head Fake?

Wait a minute… what if this is all a head fake and the market starts selling off again? It’s not impossible. Just look at the last week of June 2009 for an example. If that appears to be happening, close the covered call position with the intention of getting into the stock lower. If short a put, close or turn the position into a put spread.

If you wait for all the technical confirmation even your Grandma would want, you’ve missed an awful lot of it.

Members’ Trading Lab

The evening of Thursday, Feb. 23rd there will be a Members’ Trading Lab for CallWriter members, 9:00 pm ET. The signup link appears on the members’ home page. It will be fun and very useful, so don’t miss it.

This entry was posted on Wednesday, February 17th, 2010 at 4:25 pm and is filed under Covered Calls, Markets/Economy, 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.