The markets managed another gain on Thursday but it was a tough battle with the Nasdaq gaining only one point.

Friday could be a challenge. Google rallied +18 points after their earnings Thursday evening but IBM lost about $5 in after hours. IBM is a Dow component and Google is in the Nasdaq. That would suggest a reversal of fortunes on Friday with the Dow opening down and the Nasdaq up. How this change in leadership will play out is anybody's guess. I am still concerned that we are going to see a sell the news event on Friday now that the pattern has been set for earnings. This is also option expiration so there could be some added volatility.

The Fluor trade was triggered when FLR traded at $50.50 intraday. Next resistance is $52 and the new stop is $49.50.

I would love to get a market pullback on Friday to give us an opening for new positions on Monday BUT now that we have two positions in play I am hoping the Nasdaq bulls take the lead and keep the markets moving higher. With two weeks left in October there is still plenty of time for volatility and for portfolio restructuring by funds. Keep your fingers crossed and your stops tight.

Jim Brown



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Methodology

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.


Margin Requirements:

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)