I spent most of the day on Thursday the 25th cussing the market and the monstrous volatility that nearly wiped out all our gains for the entire month in one big opening drop. I realize every single trader on the planet faced the same opening drop and the potential for major losses. Those without stop losses today probably survived with a minimal loss. Those with stop losses did exactly that they took losses.

We were stopped out of every position we had and incurred a total loss of -$1.76. That is not the end of the world but it is highly frustrating for everyone and especially for me. It is a lot of work researching hundreds of charts, earnings dates, news and trends to make a recommendation. We were up about $3 in sold premiums for the month until the last week and two days of volatility erased the entire month.

Even more frustrating is the closing print. Had we not stopped out on anything we would have still been up in the portfolio we had at the open by another +$1.83. The stops cost us -$1.76 but the positions closed up +$1.83. The market rebound put all those positions back into positive territory.

Portfolio if we had not been stopped

Obviously we can't go without stop losses because the opening drop could have kept right on dropping. When your risk is wide open you have to use protection and we paid the price for the insurance today.

Of course had it been a gap open to the upside we would all be celebrating and closing out the month in style. Let's hope that a trending market returns soon so we can capture those big profits.

Jim Brown



Current Portfolio




No Open Positions


February Recommendation History



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)