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DeJaVu all over again

Monday, 03 October 2011 08:47

Will anyone ever follow sell in May and go away? It works every year, I write about it every year and yet investors get slammed with a down summer. The seasonally strong period is upon us and after just analyzing my universe of names, I am perplexed as to the next major direction.

Friday was a damaging day to almost every chart I analyzed breaking support in every sector including large cap tech which has been a trooper in relative performance. Many charts are in a negative MACD pattern but the RSI is closer to oversold than overbought which takes that indicator out of play. The natural resource names have been destroyed which is making me think about October 2008 and leads me to the title of this blog.

Lehman had just collapsed and the world looked bleak at best. A friend alerted me to the natural resource names, X, AKS, MON, MOS, CLF, AGU, POT to name a few and we noticed that the put premius were through the roof. My fund had been having a great year so I decided to take some risk and sell the puts for many of these names for the November strike period and about 20% out of the money on average and a premium that was another 20% of the price I would have to pay to buy the stock. This seemed like a great reward to risk play and it worked great as I was not put stock on a single name.

Selling naked puts is a risky trade but it was well thought out and I had cash that I was happy to put to work if these names sold down to my levels. I have yet to look at premiums today, but given the chart patterns, the time of year and the overall sentiment out there it might make some sense.