The falling dollar gave stocks a lift and the Dow closed over 10200.
When I emailed this morning I thought we would have a good open on the dollar weakness but this is ridiculous. The Dow gained +203 points to close at 10226. I mentioned over the weekend that Dow 10100 was critical resistance but it was not the answer for the market. The real test will come when the S&P teats resistance at 1100. With today's close at 1093 it may not be that far off.
I scanned about 100 of my watch list charts tonight and almost every one showed a sharp spike at the open and then flat line at that level for the rest of the day. There was limited follow through except for those most heavily shorted. Market volume was just a tick over 8 billion shares and rather week for a +200 point day. This was clearly a short squeeze brought on by comments from the G20 about maintaining the stimulus and the weakness in the dollar.
I did not see anything I want to play tonight. If we get a pullback tomorrow there are several positions I want to add. If we don't get a pullback at the open I would expect a hiccup when the S&P touches 1100 the first time. I think we have two good positions and I am in no hurry to add to them. The idea is to trade for a profit not trade just to be trading.
The MOS symbol change was unexpected. The recommended symbol was active on Friday but market makers changed it over the weekend. It was disappointing but so was the action in MOS today so I am not too sad that the play was busted.
If the dollar index breaks 75 again I believe it is headed for much lower levels. That break should send gold much higher but either way I believe the GG $41 put is going to expire worthless. I suggest putting in an order to buy back the position for 5-cents. I would be surprised to see $41 on GG again over the next two weeks.
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)