Some fourth quarter ideas.

For option traders, volatility is a good thing. Premium income rises for option writers… a good thing. Even the thought of paying premium has not put a damper on option buyers. Why would it? Pick the right direction and the right option can double overnight.

From my perspective, option writing strategies look pretty attractive. In almost every sector. Although trying to write calls on banks may not excite too many people. But other sectors, there is opportunity.

For example, the oil sector. Volatility is up, and so are premiums… across the board. The stocks have come off sharply and may still have some downside. But remember, I don’t think these stocks ever rallied to the point that investors were discounting US $90 per barrel oil. I think the share price for Canadian oil stocks probably reflects an oil price in the low to mid 70’s. In that light, oil can decline from here without causing extreme damage to Canadian oil stocks.

One company that has always been interesting is Canadian Natural Resources (symbol CNQ, recent price $72.04). The CNQ November 72 puts are trading at $1.00 (55% implied volatility), and these options expire on Saturday.

Of course selling November at-the-money puts has to be viewed as an aggressive trade. Something a little less aggressive trade would be writing the CNQ December 70 puts at say $2.50. If you are put the stock in December, your cost will be $67.50. And with this stock, you will have many opportunities going forward to write covered calls on those shares. If the stock is not put to you, that’s $2.50 per share in your pocket before Christmas.

Speaking of Christmas, make sure you pay particular attention to the retail sales numbers coming out of the US. US consumer spending represents approximately 70% of US GDP. And with the market torn as to whether we will see a US recession next year, these numbers will go a long way to providing some clarity.

If we get a US recession, it will filter into Canada. It may not be as severe on this side of the border, but there will be pain.

If you are leaning towards the no recession side, you might consider taking a position in either Canadian National Railways (symbol CNR, recent price $48.59) or Canadian Pacific (symbol CP, recent price $63.14). Transportation companies are an excellent gauge of economic activity.

With these stocks, you could look at writing say the CNR December 48 puts at $1.45 (implied volatility 29%) or if you prefer CP, look at the December 62 puts recently trading at $2.00 (33% implied). One caution with CP. The bid / asked spread is, in my opinion, abnormally large. Which means that if you take a position you may have to hold it to expiration.