The +$6 spike on Kinetic Concepts guaranteed us nearly 100% profit on that position.

Kinetic announced it won a patent battle over British orthopedic device maker Smith & Nephew and spiked +15% on the news to $50. Our $40 put is bid/ask zero/.05 so the odds are good we are going to close that position for a 90-cent profit on Thursday.

The Freeport McMoran position has been closed at the 10-cent target for a profit of a whopping 31 cents. That was a gap up entry so we had a bad fill on the play initiation.

Maintain your stops. The market is not acting very bullish even though it did close higher today. I believe we could be in for some volatility before the week is over.

Jim Brown



Current Portfolio



Current Positions


FDX - FedEx
Put in a bid to buy back the option at 10-cents or less.
Maintain stop loss at $84.75.

KCI - Kinetic Concepts
Put in a bid to buy back the option at 10-cents or less.
Maintain stop loss at $42.25.

FCX - Freeport McMoran
Closed at 10-cents for 31-cent profit.

UYM - Proshares Ultra Basic Materials
Maintain stop loss at $32.95.

BUCY - Bucyrus Intl
Maintain stop loss at $62.75.

WLT - Walter Energy
Maintain stop loss at $82.75.

BHP - BHP Billiton Ltd
Maintain stop loss at $75.75.

TM - Toyota Motors
Maintain stop loss at $72.75.

GMCR - Green Mountain Coffee
Maintain stop loss at $84.75.

PCP - Precision Cast Parts
Maintain stop loss at $115.00.


New Recommendations


None today


March Recommendation History



Click here for February Results

Click here for January Results

Click here for December Results

Click here for November Results

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)