Option Investor

Option Writer Portfolio - May

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Just a reminder: For those of you that are new, we are building the portfolio based upon a $50,000 option writing strategy allocation. I am basically writing this newsletter for two types of traders: aggressive and conservative. I am working on a names for each method as well as a better way to provide streamlined reports for both methods. So as not to get a margin call and be forced to close out positions, the max marginers crew sells up to 10 positions with the average margin requirement not to exceed $5,000. While the max marginers are more aggressive, we can also allocated the portfolio by assuming that the worst case scenario is to be assigned all 10 positions at the same time. With standard margin we can buy up to 2 times the account balance or $100,000. That is why the trade grid below has an assigned cost basis calculation. With this strategy, we can sell up to $10,000 assigned value per position. It gets a little tricky when we start to sell calls along with the short put or vice versa. This is also called a strangle. You will see this strategy applied more frequently in consolidating markets. The trade off to being aggressive is higher return volatility.

MDR - McDermott International, Inc. is an engineering and construction company with specialty manufacturing and service capabilities. The Company operates in three business segments. Offshore Oil and Gas Construction, Government Operations and Power Generation Systems. Earnings are expected to be reported on May 12th.

We are selling 2 of the May 50s for about $1.15 - $1.20 per contract. This yields an approximately 23% max return on the initial cash margin. The max margin crew can sell up to 6 contracts and not push over the $5,000 max margin requirement.

Nearterm support is at $55. This level was old resistance. Old resistance is new support. After that is broken, the 50 and 200 day moving average is the next support level that comes into play. We are using the 50 DMA at 51.70.

Risk Management for MDR
Strike Stop = $ 50.00
Cost Basis Stop = $ 48.83
Technical Stop = $ 51.70
Premium Stop = $ 52.35

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