Despite the early December volatility it was a good month. We had 17 winners and 7 losers and managed to pocket $904 per contract for the entire month.

December started out like November ended with a tight, range bound market. That is not the kind of market you want to be writing naked options. Maybe it would have been good for writing spreads but for naked puts and calls your entries and exits would have to be perfect.

We had one big loss for the month with the big gap down on MXB on no news. MXB dropped nearly 10% at the open on Dec-17th with no explanation and although it quickly rebounded we were stopped out on the opening dip for a $1.05 loss.

Despite the nagging stops from the range bound market we were able to end December with more than $9 in gains assuming you only traded one contract of each position. I know everyone did not trade every position so hopefully you skillfully avoided the losers and only picked the winners.

I am looking forward to 2010 in hopes of a return to a trending market.

Jim Brown


Current Portfolio




December Recommendation History



Click here for November Results

Click here for October Results

Click here for September Results

Click here for August Results


Methodology

We do not sell out of the money puts for a few cents and then hope the market does not correct and cost us a fortune to exit. I don't like to risk a dollar to make a quarter.

The concept for Option Writer is to find solid momentum plays with enough volatility to inflate the option premiums. We will sell in the money naked puts ahead of the stock price and let the stock rally to our strike.

Selling in the money puts allows us to capture nearly dollar for dollar the movement in the stock price.

Because we are selling in the money that same dollar for dollar move can go against us as well. For this reason we establish tight stops to take us out of the play for a loss of a few cents rather than let the losers grow and "hope" they rally again. In a typical month we could get stopped out of twice as many plays as we close for a profit but those stops will be minimal and the winners worth the trouble.

If you do not have the ability to sell options you can turn the plays into spreads by buying a lower strike put. This will decrease your margin requirements but it will also decrease your profits.


Margin Requirements:

There are several different formulas for determining margin requirements for naked put writing. These are normally broker specific and some can require larger margin requirements than others.

Here is the most common margin calculation for naked puts.

100% of the option premium + ((20% of the Underlying Market Value) - (OTM Value))

For simplicity of calculation simply use 20% of the underlying stock price and you will always be safe. ($25 stock * 20% = $5 margin)