The second day of short squeezing knocked two more positions off our portfolio.
Today's squeeze stopped us out of Hartford with a 35-cent profit and out of Time Warner with a 30-cent loss. The TWC loss was prompted by expectations of strong results out of News Corp and shorts wanted out of TWC before they report earnings on Wednesday. If TWC spikes after earnings we will reenter the position.
I am adding two plays tonight based on news events of today.
Option symbols are giving everyone a fit today. Instead of changing the symbology to remove confusion it appears the change added confusion because every broker and quote/chart provider has enacted their own subset of the new symbol. I am using DTN.IQ for my portfolio tracking and I doubt these symbols match anything you are using. You will have to take the English description and get the right symbol for you on your quote system.
CHRW - CH Robinson Worldwide $52.28 (Naked Call Write)
CH Robinson posted disappointing earnings after the close and lousy guidance. The stock fell from the close at $57.42 to $52.28 in after hours. Given the lousy guidance I suspect it will continue falling. We need to sell the $55 call short at the open and hopefully there will be enough holders left that expect a rebound that we can get a good price for it.
Sell March $55 Call CJQ1020C55 (CJQ-CK) currently $3.25, Stop at CHRW $54.05.
Chart of CHRW
AMD - Advanced Micro Devices - $7.92 (Naked Call Write)
AMD can't get out of its own way and were it not for the $1.3 billion Intel payment last quarter AMD would have lost $57 million. On Monday a nondescript analyst upgraded them to an outperform and shorts had to cover. Today Goldman Sachs added them to their "conviction sell list." I believe their fate is sealed and they will continue their downward trajectory once the market gets out of short squeeze mode. AMD has such a large short interest it rallied this week on the squeeze but I think the trend will return.
Sell Short March $7.00 Call AMD1020C7 (AMD-CJ) currently $1.16, Stop AMD at $8.30
Chart of AMD
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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)