It was bound to happen eventually. These triple digit short squeezes will eventually stop out almost any position.
With a +229 Dow gain intraday it should not be a surprise that we were stopped out of all but one position. Oil was up and the market was up and we took the hit.
We escaped with a profit on three positions but we were hammered on the short Unisys call. UIS gapped open to $35.33 and cost us 65-cents on the stop. We gained 94-cents on the Russell short call and 55-cents on the XLE short call and broken even on CHRW.
I believe the market is going to remain highly volatile for the rest of the week so I am only adding one play tonight. I wanted to add a couple more but opted for patience instead.
TM - Toyota Motors - $74.63 (Short Put)
Toyota has been crushed over the last three weeks due to the massive recalls on their cars. The stock was up +1.75 today and appears to have found support at $72. Toyota has massive brand loyalty and I believe this is a buying opportunity. Hopefully others see it that way s well.
Sell MAR $70 PUT TM10O70 (TM-OW) currently $1.85, Stop at TM $71.95.
Chart of TM
February Recommendation History
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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)