On a day with a huge market downdraft you would expect to lose some plays when stops are hit.

Meritage Homes hit our stop loss at $21.50 today to stop us out of the short put position. Fortunately we had been in it long enough that the stop exit at 25-cents was still a 60-cent profit. These numbers are not big but they add up over a month.

We were successful in entering the XLE and IWM short calls at the open and both appear to be solid plays. We could not have picked a better day to short those positions.

I looked at a couple hundred stocks this afternoon to see if I could come up with some more plays for February and found a couple that should work. Despite the market sell off today I still believe the path of least resistance is down.

I am using DTN.IQ for my portfolio tracking and I doubt these symbols match anything you are using. You will have to take the English description and get the right symbol for you on your quote system.

Jim Brown



Current Portfolio





Current Recommendations


MMS - Maximus $51.65 (Naked Call Write)

Maximus rallied +3.54 on a very bad day as shorts were squeezed by better than expected earnings. The spike was exactly to resistance. As a tech stock the recent pattern has been for earnings reporters to decline in the days following a report. I am picking a February ITM call option in hopes we can ride it down to be OTM.

Sell FEB $50 Call MMS10B50 (MMS-BJ) currently $1.80, Stop at MMS $52.50.

Chart of MMS


UIS - Unisys Corp - $34.21 (Naked Call Write)

Unisys spiked for a decent gain on short covering after reporting better than expected earnings. However, they were on lowered costs and not top line growth. With everyone leaning bearish the shorts were caught off guard again. Unisys just completed a 1:10 reverse split to raise their stock price. That means there is more room for sellers not that earnings are over. The $35 call is just OTM and any give back by Unisys this week should reduce the premium considerably.

Sell Short February $35.00 Call UIS10B35 (UIS-BG) currently $1.05, Stop UIS at $35.15

Chart of UIS


ANF - Abercrombie & Fitch $33.2 (Naked Call Write)

Abercrombie was boosted on Thursday by strong Chain Store Sales numbers for January. He month of January is typically a decent month for retailers as they sell off leftover holiday wares at cheap prices. February is not so hot. ANF ran several in store promotions featuring big discounts and free $25 gift cards and they saw the first month over month improvement in sales since April 2008. I doubt they can continue that in February as consumers ran out of money using gift cards and gift exchanges in January.

Sell Short Feb $33.00 Call ANF10B33 (ANF-BK) currently $1.39, Stop ANF at $34.05

Chart of ANF


February Recommendation History



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Click here for October Results

Click here for September Results

Click here for August Results


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)