A day like today makes you wish we had backed up the truck and written a dozen different puts at the open.
This was an outstanding day for tech stocks but the other sectors were not necessarily as hot. Our three new plays launched in style and without a market implosion they should be profitable until expiration. We are so far out of the money after today's rally that it would take a serious turnabout in the market to cause trouble.
Unfortunately the rally took all the premium out of most puts and unless you are writing right at the money tonight you are not going to get more than 35-40 cents. We need a volatility dip to reflate the premiums so we can add some more positions. A nice 50-75 point drop in the Dow and a quick rebound back to positive territory should work. After today's gains in the Nasdaq it would be nice if the Naz could give back about 10 points.
No plays tonight but expect some tomorrow.
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)