We managed to successfully close all of our positions today and launch three new ones.
As George Peppard always said on the TV show A-Team, "I love it when a plan comes together."
The plan for Tuesday was to buy back the Hartford (HIG) $25 Put for 40-cents and we had no problem with that with 39-cents the low for the day. Closing for 40-cents gave us a $2.25 profit on that position.
The next step in our plan was to try and close the Saint Mary (SM) $30 put for 50-cents. The low for the day on that put was 50-cents so another successful exit. Closing for 50-cents gave us a profit of $2.50 on that position.
I also suggested closing the position on Suntech Power (STP) at the open because of the First Solar downgrade and the impact on the solar sector. Fortunately STP gapped open to $16.30 after closing at $15.55 so we were able to exit that put for $1.50 and a $1.10 gain. Suntech went on to rally into the close and the put declined to 95-cents but no use crying over lost profits. We avoided a potential loss and ended with a successful play.
We had three new plays to target this morning and everything went according to plan.
McDermott (MDR) gapped open to $26.84 and the October $32 put traded at $5.20.
Fuel Systems (FSYS) opened at $36.92 and the October $45 put traded at $8.40.
Walter Energy (WLT) opened at $61.40 and the October $65 put traded at $6.40.
Check the portfolio graphic for the new stop losses on each of those positions.
Since this is triple witching options expiration week and the market has been up for several days now I am not planning on adding any new positions until we get a dip. This is September and the next five days could be extremely volatile. I would prefer to stay profitable rather than loading up a bunch of plays only to be stopped out on a morning surprise. There is plenty of time in the October cycle to pick up a couple more plays.
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We do not sell out of the money puts for a few cents and then hope the market does not correct and cost us a fortune to exit. I don't like to risk a dollar to make a quarter.
The concept for Option Writer is to find solid momentum plays with enough volatility to inflate the option premiums. We will sell in the money naked puts ahead of the stock price and let the stock rally to our strike.
Selling in the money puts allows us to capture nearly dollar for dollar the movement in the stock price.
Because we are selling in the money that same dollar for dollar move can go against us as well. For this reason we establish tight stops to take us out of the play for a loss of a few cents rather than let the losers grow and "hope" they rally again. In a typical month we could get stopped out of twice as many plays as we close for a profit but those stops will be minimal and the winners worth the trouble.
If you do not have the ability to sell options you can turn the plays into spreads by buying a lower strike put. This will decrease your margin requirements but it will also decrease your profits.
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)