Another gap and fade day in the markets with crude knocked below $70 again and Fuel Systems dropping -10% on no news. Lots of stock charts fading into the close despite the indexes posting gains.
We went two for three again with entries on FCX, TSL and USO. The drop by oil of nearly a buck to $69.81 late in the afternoon took us out of the USO position before we really got settled in good. Fortunately because the USO is a high volume ETF we only lost 8 cents on the stop.
Fuel Systems imploded with a 10% drop of $4.98 and took us out of that position at our stop of $47.50. That is exactly where we entered two weeks ago but fortunately the premium had eroded significantly and we escaped with a profit of 64-cents. That is about half what we could have pocketed yesterday but FSYS was moving up nicely. Who knew what today would bring. There was no news on FSYS to explain the drop so evidently some big holder decided to take profits. I toyed with the idea of going back into FSYS tonight but with no news that could be suicide so we will wait to play another day.
Chart of Fuel Systems
I really want to get into a January position on oil because I believe $70 will be support for sometime. However, with Cushing filling up on oil storage and futures expiration just a week away on the 21st we could still see some volatility. I will keep watching and hopefully we can pick the right entry.
I am not going to add anything tonight. The dollar is flat, gold is up slightly and oil is just under $71. Futures are up +3.50 so I am hoping we get some follow through and have a decent day tomorrow. Have a good weekend and I will update everything and pick some January positions on Sunday night.
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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)