Option Investor

Option Writer Portfolio - August

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Oil & Gas Ultra Short Proshare (DUG) is supposed to emulate 2 times the inverse daily movement of the Dow Jones Oil & Gas Index. DUG's inverse counterpart is DIG. These people designing and naming all of the new ETFs are creative. So by selling the puts on DUG that is bearish on the Oil & Gas Sector.

The max return is about 28% based upon the initial cash requirement of $1,040. Notice that instead of selling the 24 strike as we've done for the last two months we are selling the August 26 strike on DUG for an initial margin requirement of $1,340. The price target is $0.75 on the 26 strike. If you want a little more room, sell the August 25 strike for about $0.50 and a 20% max return.

Our first price level to be concerned with is a break of the 50 day SMA at $28.60. Followed by that we have the slight uptrend line at around $25.90. A break of $28.60 may alert us early to roll down to the 24 strike. The cost basis stop is at $25.25 which is slightly less than the May low of $25.41. There is about to be some news from the White House regarding offshore drilling, so beware of the volatility.

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