The Fed did exactly what everyone expected and we got some limited volatility with the obligatory sell off. What happens next is the real test for the market. Do we rally on the benign announcement or does the market exaggerate the Fed's worries about inflation and sell off?

Thursday will be a telling day for the markets. The direction it picks tomorrow is likely the direction we will see all next week. The Nasdaq closed above new support at 2200 for the second day but the Dow and S&P are still below their prior resistance of 10,500 and 1110-1115. The Russell finished higher at 611 and that is also a positive indicator for year-end. A move over 613 would be very positive.

The dollar index took flight after the benign Fed announcement to trade at 77.20 and continues to move higher tonight.

We were successful in exiting all our remaining December positions and although we could have probably held them until Friday's expiration a negative Fed announcement could have wiped out our profit in a heartbeat. I am perfectly happy taking a little less profit safely instead of risking it all to make a few more pennies.

The Palm $10 Short put was closed at 8-cents for a 29-cent profit.

The FCX $75 Short put was closed at 20-cents for a 54-cent profit.

The Visa $85 Short put was closed at 25-cents for a $1.30 profit.

The Cliffs $44 Short put was closed at 35-cents for a 75-cent profit.

We have two remaining plays in the portfolio with January expirations.

No new plays today. Futures are diving overnight and historically the day after a Fed meeting is normally down rather than up. It is that "sell the news" mentality.

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

Jim Brown



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Recommendation History



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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)