Option Investor

Option Writer Portfolio - July

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The Dow Jones Oil & Gas Ultrashort Proshare (DUG) is declining today while crude is also declining. DUG trades 2 time inversely to the Dow Jones Oil & Gas Index. That means that the Proshare moves down 2% if the Index moves up 1%. I like the Proshares because they are superoptions. If I am right the ETF moves up and Out of the Money twice as fast leaving the option profitable with a smaller move in the Index. It works both ways though.

We are selling the July 24 strike for approximately $0.65. For the purposes of the newsletter we are selling 4 contracts in attempt to keep the portfolio's notional value less than $100,000 or $10,000 per position. The current margin requirement is derived from 10% of the underlying security's price plus the premium. The margin could increase significantly if the price declines toward the strike price. This would cause the max return to decline. However, the return is estimated to be 27% on the initial margin requirement. This trade requires about $1200 - $1300 in margin. If all of the positions this month only cost $1300 you can do 7 of the 10. Price support is at $25.95 from June 6th and $26.48 from the lower Bollinger Band and the uptrend line. We could wait for the price to decline to the trendline but I want to sell ahead of the rest of the option traders about to roll months. I think that 24 is a good level to sell puts at just in case Boone Pickens is right with his $145 a barrel estimate sooner rather than later. I prefer to use the all time low of $25.41 from May 21st as the risk management level.

Risk Management for DUG
Strike Stop = $ 24.00
Cost Basis Stop = $ 23.35
Technical Stop = $ 25.95
Premium Stop = $ 25.00

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