After Austria nationalized a bank too big to fail the futures returned from their overnight lows and the markets rallied shortly after the open. We were successful in closing all buy one of the positions outlined in the Monday night email.
Tuesday was a discard day in the markets but the morning rally succeeded in letting us close three of the four positions outlined on Monday night.
The Akamai position was closed for a nickel, Mosaic for a dime and Trina Solar for a nickel. The Palm put traded as low as 7 cents but never hit our nickel bid.
Palm has earnings on Thursday and I want to exit the position before the market closes on Wednesday afternoon. Because Palm was heading lower at the close I am going to recommend we exit at the open regardless of price. The closing bid/ask was 8/10-cents so that is probably where it will open. I don't want to take the chance that traders will sell Palm ahead of earnings expecting a negative surprise.
Close the Palm Dec-$10 put at the open.
All of our remaining plays are profitable and the Visa, FCX, CLF plays should expire worthless in a normal week. However, because of the Fed meeting this is not a normal week. We could have extreme volatility on Wednesday afternoon if the Fed announcement is market negative. Therefore I want to close the remaining three December positions if possible.
The Visa play is proceeding as expected with Visa now trading over $86. The $85 put has three days to trade and is now out of the money. It traded at a low of 50-cents on Tuesday. I want to close the position if possible before the Fed announcement.
Place a buy to close order on the Visa $85 put for 25-cents.
Maintain a stop loss on the Visa position at $85.40.
Freeport McMoran traded up to nearly $80 today before falling to close at $78.12. We are short the $75 put which traded with a low of 14-cents and closed at 30-cents. The strong dollar pressured gold prices putting pressure on FCX. We could probably wait this one out until expiration since there is support at $76.50 but given the strength in the dollar and the ability of gold to drop $25 a day I want to close this position if possible.
Place a buy to close order on the FCX $75 put for 20-cents.
Maintain a stop loss on the position on FCX at $77.
Cliffs has rallied well over our short $44 put to $45.30. That is not close enough for me to try waiting for expiration. In view of the potential Fed volatility let's try to close that position as well.
Place a buy to close order on the CLF $44 put for 25-cents (low for today)
Maintain a stop on the CLF position at $44.50
Hopefully the Fed will not change the "extended period" language and the market can move higher into year-end. I am not adding any positions ahead of the FOMC announcement.
If you have not taken advantage of the Option Investor End of Year Renewal Special here is the link to the offer. This is the cheapest rate we offer for the entire year. Nobody can get the core newsletter package at a better rate.
Click here for the 2009 Renewal Special Details
Click here for November Results
Click here for October Results
Click here for September Results
Click here for August Results
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)