A plus 155 Dow day after the jam job on Thursday's close. Sure glad we had downside triggers on all those lottery plays. I am really glad we did not get a big opening dip and then a +155 point rally!

Actually I am not too surprised we had a big day for the first day of the year. The first day of 2009 started with a +258 point Dow gain. This is the retirement money flowing into funds and they have to put it in the market.

If you recall in my recent Option Investor commentaries I suggested a couple weeks ago the decline would be towards the end of this week and I thought there would be a minor new high early in the week.

Actually I had convinced myself last weekend that that the high last week could have been the false breakout. It is never dull trying to analyze daily moves in light of the big picture.

I still believe we are going to see a drop over the next 5-10 days. I am going to update the entry points for some of those naked call and long put plays from Sunday.

Only three were triggered and those were Gardner Denver short call and long puts on Green Mountain and AvalonBay. Yes, the trigger points were different between the naked calls and long puts since the risk factor is at the opposite ends of the spectrum.

The Trina Solar (TSL) trigger was $52.50. I am changing it to $55.50.

The Interoil (IOC) trigger was $75.00, and I am leaving it at $75.

There is only 24-hours left 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



Current Portfolio




Current Recommendations


I am reposting these prior recommendations as a reminder:

The Trina Solar (TSL) trigger was $52.50. I am changing it to $55.50.

Sell Short Jan $45 Call TSL-AI currently $11.70 ONLY if TSL trades at $55.50

If you can't sell naked calls:

BUY Jan $50 Put TSL-MJ currently $.45, ONLY if TSL trades at $55.50

EXIT TARGET: Exit the trade if TSL trades at $47


The Interoil (IOC) trigger was $75.00, and I am leaving it at $75.

Sell Short Jan $60 Call IOC-AL currently $21.00 ONLY if IOC trades at $75.00.

If you can't sell naked calls:

BUY Jan $70 Put IOC-MN currently $.85, ONLY if IOC trades at $75.00


Naked Call Candidates (Lottery plays)

Long Put Candidates


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)