I am definitely not complaining about the pre Christmas rally. I am continuing to raise the stops so we will capture our profits when this holiday cheer comes to an end.
We lost PCP today to a stop but still captured 67 cents because of the raised stop. A few quarters here, a few there and pretty soon you have a trading account that is brimming with extra cash. We could hold on for the eventual expiration for some of these but once a decline begins we start guessing and worrying over where it will end. I would always take the profits and enter the play again later like we did with Trina Solar.
I am probably not going to send out an email on Thursday unless there is something earthshaking to report. With half a day of trading and the futures already rising I am hoping it is as uneventful as the beginning of the week. On Monday, after the long weekend those positions still open should lose enough premium to consider closing them before year end. Time will tell.
Merry Christmas to everyone!
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
December Recommendation History
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)