Option Investor

Option Writer - April Portfolio

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Prior to listing the April suggestions, lets take some time to discuss the Option Writer business plan.

1. Sell options on up to 10 positions

2. Remain directionally unbiased (Establish put and/or call option positions)

3. Set return goals for each position (i.e. initial return greater than 10%)

4. Integrate risk management (Stop loss parameters)

5. Integrate risk maintenance (Profit taking)

Now that we got that out of the way, it is important to review the plan frequently and amend it if needed. I am positive the lost will become more detailed and long as we trade. It is just as important to establish one's own trading goals and trading plan. Those too should be revisted frequently. A successful trader is only as good as thier trading plan.

Finally, I am going to present the trade ideas by ultilzing a $50,000 assumed option writing allocation. The positions will be estabilshed according to the cash allocation techniques I utilized trading the hedge fund. That is, by assuming a $50,000 account can actually purchase up to $100,000 worth or securities if assigned, the conservative approach is to establsh the number of contracts from that basis. For instance, 10 positions would approximately result in a $10,000 per position allocation. This is a conservative option writing approach. For those of you that want more exposure, I will mention the approxiamte number of contracts to reach the max margin on each trade. By the way, the average max initial margin is $5,000 ($50,000 divided by 10 positions).

Due to the volatile nature of the equity and credit markets, I will be discussing only a few positions at a time. Also, since I lost the original post due to a computer glitch and the futures are down 30 plus points, I am going to post only one tonight and follow up tomorrow with the rest (assuming they held above support).

MOS - The Mosaic Company engages in the production and marketing of crop nutrient and animal feed products worldwide. It operates in four segments: Phosphates, Potash, Offshore, and Nitrogen.

Sector: Basic Materials
Industry: Agricultural Chemicals
EPS Date: April 4th

MOS provides us with an initial return of 28%. That is due to the increased implied volatility found in the front month options. The reason the premium is high is because the EPS date and the potential price volatility of agricultural commodities. We are only doing one put option because of the implied risk. However, those of you that are more aggressive could trade up to 4 contracts without breaking above the $5,000 max initial margin.

The chart above shows that the price has been advancing nicely for months. The 50 (Cyan) and 200 (Red) DMA are both trending upwards. The uptrend line is coincidentally close to the 50 DMA. Depending upon the stock's reaction to the market open, we might get a better opportunity to sell closer to the 50 DMA at arounf 100 - 102. The strike is the same but the premium should be higher.

Strike Stop = $85

Cost Basis Stop = $82.58

Technical Stop = $83.43 (Gap from January 24th)

P/L Stop = $96.10

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