The Asian markets are strongly positive again on Tuesday and I an thinking about taking profits in the FXI position before the GDP release on Thursday.

The FXI gained +1.32 on Monday and unfortunately it was mostly on a gap open so we really did not get the benefit of the gain but we are in a profitable position. The GDP for Q3 is scheduled to be released on Thursday and with the gap up/down on the FXI based on Asia trading I am thinking about an exit on Tuesday. We don't want to get caught in a gap down ahead of or after the GDP. If we get another +$1 gain on the FXI on Tuesday that should be nearly all profit for us and a good place to exit. I will send an email on Tuesday with a recommendation. The afternoons have been up on the FXI recently so let's hope that trend continues.

S&P futures are up +5.50 as I type this at 3:15 AM and oil has traded over $80. The bull appears to be alive and well contrary to earlier reports of his demise.

Jim Brown



Current Portfolio




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)