Cisco's vague guidance put the pressure on the tech sector and on the network stocks. Juniper (JNPR) had spiked open on Monday when we initiated the current short $25 put. After Cisco's disappointing comments we saw Juniper decline to $25.01 on Thursday. Our stop is $25. Given the Cisco gloom I am going to recommend we close the Juniper put on Monday if Cisco trades at $25.25. The Friday low was $25.30 with a close at $25.37.
I mentioned this a couple weeks ago but I want to mention it again this week. My game plan for Option Writer is to take no losses. I understand that some are inevitable but I want to do everything possible to prevent losses from bad play management. If we have a position that is in danger of slipping into a loss I will be proactive in closing it. Sitting on a losing position can sometimes work if the market reverses but sometimes a losing trend continues to be a losing trend. If we keep trying to "hope" the loser back to life there are only three things that can happen.
First, our time and mental energy is spent worrying about that losing position. I don't know about you but I would rather worry about finding the next winning trade than making up reasons why we hope the loser reverses. Second, trends tend to continue. If a stock is moving up it tends to keep moving up. Same with a falling stock. If it is trending down it is more than likely going to continue trending down. Trends change all the time and they also accelerate. Ask anyone holding GENZ this week if they wish they had sold last week. Small losses can't turn into big losses if you close them early. The third possibility is a recovery in the play but I have seen far too many times where that recovery never came.
When we are adding up the wins and losses at the end of the year I want the individual losses to be very small. Losing 10-cents to 15-cents per share only deducts $10-$15 per contract and should equate to only 10-15% of an offsetting winning trade. Letting those losses accelerate into 75-cents to $1 per share before stopping out can erase the gains completely from a winning trade.
When we are writing premiums of 50-cents to $1.25 per share we should be able to pocket 75% of those premiums after commissions. There is no room to allow us the luxury of some major losers. Keep the loss sizes to 25% of the gains and we will always be profitable in the long run.
How many times have you seen someone rack up month after month of nice gains only to have one month where the market went against them for major losses because they held on in hopes of a recovery? Their months of gains are wiped out in only a single month of losses.
Using the "no loss" strategy we will have a lot of plays that are closed for basically a breakeven. However, a breakeven is a lot easier to digest because it does not detract from the gains.
MSCI (MXB) closed at $28.71 on Friday. Our short $22.50 put should expire worthless but I want to try and close it in advance for .10 or less. The markets could easily roll over here and while I think MXB has little chance of returning to $22.50 I would rather eliminate the risk where possible. We sold the put for 90-cents and exiting for 10-cents is a reasonable profit margin. Of course you are free to hold the position until expiration and avoid the $10 debit and commissions.
Recommendation: Close the August $22.50 Put MXB-TX for .10 or less.
LDK Solar (LDK) appears to have found resistance at $12. Support is $10.75. We are short the August $10 put for 60-cents. If we can close it for 10-cents or less I would take the exit. Otherwise maintain a stop on the position at LDK $10.50.
Recommendation: Close the August $10 put DLO-TB for .10 or less. Maintain stop at $10.75
Mosaic (MOS) appears to have found resistance at $55 with initial support at $53. We are short the August $50 put. The volatility in MOS is keeping the premium elevated. Rather than try to exit this position I am going to suggest we maintain the stop at $50.75. We have two weeks left in the August cycle and one more decent test of resistance should see the premium start to bleed. The volume on this strike was 804 contracts on Friday. This level of volume will also allow us to maintain a stop on the option itself. I am going to suggest a stop loss at breakeven on the option according to my "no loss" strategy.
Recommendation: Maintain a stop loss on the MOS-TJ put at $1.25 and on MOS at $50.75
With only two weeks left in the August cycle nothing I could find had any premium left to sell and anything that might have been a possibility either had earnings next week or appeared to have peaked last week.
I know this is boring to wait for a market dip to create new low risk entries for us but you can't lose any money waiting in cash. It is boring but it is safe. I wrote a very long market wrap this weekend and explored the various possibilities for the August markets. I can't help but think there is a retracement in our near future. If we could just get a real 2-3 day bout of profit taking it would improve the available plays immeasurably. Please be patient. If we can get even a minor dip it will pump up the premiums on the September cycle and set us up for the next expiration period.
New Recommendation - Conservative
None at this time
No active watch list plays
COF - Cancel entry
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)