The gap open on Monday filled us at levels that were much higher than Friday's close. Premiums deflated and now we are at risk for market weakness.

The gap open like we saw on Monday is dangerous. Even when I added the qualification of waiting until 10:AM it was still dangerous. When a stock gaps up 3$ at the open and then moves sideways for the rest of the day I really start to worry. That is a clear sign of a short squeeze at the open and no follow through from real buyers.

Several of our plays did just that. We saw the big gap up at the open and then in several cases a lower close as traders took profits.

If you look at the portfolio graphic you will see that we are at a breakeven or even a loss on every entry because of the opening gap deflating the premiums.

I am really worried that the rally will not continue and we are going to be stopped out on a lot of the positions.

The S&P rallied past the 200-day resistance at 1113 but failed to reach the resistance high from June at 1131. It came to a dead stop at the 100-day average at 1126. This would be a prime spot for a rally failure since it was a news generated short squeeze rather than real buying interest. Check the portfolio graphic for new stop losses. We have to raise the stops because of our fills at deflated prices. When-If the stock price begins to fall the premiums will inflate rapidly and cause us grief. The only way to avoid a big loss because of the gap is to tighten the stops.

I had a reader email today asking how to set stop losses using the stock price as the trigger. I get this email a lot. Most if not all brokers now have "conditional stop losses." This means you can set multiple conditions for executing a stop.

The most common conditional order is on the stock price. Locate the conditional order function on your broker screen and navigate through the execution process. It will probably ask you for the symbol you want to track and then the price of the trigger and if you want a trade at, above or below using your choice of ask, bid or last price. Then specify what to do when the condition is met. That would be "Buy XYZ option to close" in most cases.

Many brokers allow conditions that don't relate to the actual option. For instance you could setup a condition for Intel trading below $20.50 and the action would be to buy a put option on the QQQQ. They don't have to be the same.

At Interactive Brokers I have used conditional orders for years and your trigger can be any valid symbol and condition.

I hope this helps. If you can't find your brokers conditional order screen just pick up the phone and call them. In most cases they will be glad to help.

Jim Brown



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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)


Prices Quoted in Newsletter

At Option Investor we have a long-standing policy prohibiting the editors and staff from actually trading the individual recommendations in order to conform to SEC rules concerning trades.

The prices quoted in the newsletter are the end of day prices in most cases.

When discussing fills or stops the prices quoted are the bid/ask at the time the entry trigger or exit stop is hit. This is NOT a price that someone on staff actually got using a live order.

For entry/exit points at the market open the prices quoted will be the opening print. The majority of the time the readers are able to get a better fill than the opening print because of market maker bias at the open.

For trades with an opening qualification the prices quoted will be the bid/ask at the time the qualification was met.

All of these rules normally produce worse prices than an active trader would normally get. Because they are standardized there may be some cases where a price quoted was better than an actual fill. If you received a price that was dramatically different than what was quoted just send us an email and we will use your price.