I don't like the way the market is shaping up for Wednesday and Thursday. We had a big sell program at the close and futures are drifting lower overnight.
I am afraid that there are enough people expecting a dip next week that the window dressers are not going to be able to keep the indexes pinned to their recent highs. We were stopped out on Trina Solar today not because of any news causing a -4% drop but because a +1000% gain since March will not go unpunished when the calendar rolls over.
We came close to several of the exits but the put premiums would not bleed off when the underlying equity was negative for the day.
I am recommending we close all our positions at the open on Wednesday. If we get the sell off everyone is expecting then we saved our profits by being cautious. If the sell off does not show up we still pocketed another $4 in profits. Either way we collect the money and exit year-end with no risk.
It is not that I am afraid the markets may go down. I am afraid they might gap down hard over the next five days and I don't want to fall into that trap of giving back our profits with no chance to stop out gracefully.
Exit all positions at market at Wednesday's open.
If you have the luxury of being at your computer at the open feel free to ride any bounce as long as you want but the official exit will be the opening print on all positions.
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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)