The rally on the dollar broke above prior resistance and sent the dollar index to 75.65 and well over the 74.77 of the prior day. These are major moves in the currency markets producing equal inverse moves in equities.
The price of oil dropped sharply to touch $76 due solely to the rebound in the dollar. This -$4 drop in one day crushed oil stocks. Strangely the only position we were not stopped on was the Stone Energy play but it was close with a $19.49 low against a $19.40 stop.
The IWM position was stopped at 58.30 at $1.81 on the option for a profit of $1.29. The GoldCorp position was stopped at $43 at 40-cents on the option for a 40-cent profit.
The dollar is down overnight and the S&P futures are up +3 at 5:30 AM. I wanted to go back into the IWM position at Friday's open with a tight stop at 57.85. There is support on the Russell at 580 and exactly where it closed. However, all the indexes are looking suspiciously like a roll over in progress. This is the Friday before expiration and we could see some extreme volatility today. There is no rush to trade again. Let's wait until Monday and see if today's decline was a one-day wonder or did the failure at S&P-1100 again curse the rally for this week.
Oil prices are rallying on the falling dollar so the SGY may escape the stop.
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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)