The market appears reluctant to decline further although it will be a tough fight to move higher.
Abercrombie spiked higher on Friday on good retail earnings from others. Abercrombie does not report until this week. The rebound stopped us out at 33.30 but we still managed to capture a 51-cent profit.
I wrote in the market wrap this weekend that the charts seemed to be telling us there was a breakout ahead. Of course you needed a bullish bias to see the glass half full. I am going to try and pick on a couple stocks this weekend that have significant premiums and a decent trend. I don't want to load up the portfolio for a move in either direction because there are simply too many geopolitical events that could explode in our face at any minute.
However, if the market starts to move higher over the next couple weeks I am going to start writing some ITM puts for longer dated options. This is the best way to maximize this strategy. For instance writing a July $90 put on RIMM is worth $20 in premium for the same margin cost. All we need if a positive market trend and we can start capturing some of these big premiums.
SNDK - SanDisk - $26.98 (Naked Put Write)
SanDisk appears ready to break through the bullish wedge resistance at $27 and more higher. It is well above the $25 strike and should give us an opportunity to sell a put on a cheap stock.
Sell MAR $25 PUT SNDK 10O25 currently $.75, Stop at SNDK $25.50.
Chart of SNDK
IOC - InterOil Corp - $66.97 (Naked Put Write)
We have been here before. IOC has great option premiums and has proven it can move quickly. Oil prices tend to bottom around President's Day so I am hoping the current rebound in IOC continues.
Sell March $60.00 Put IOC 10O60 currently $3.20, Stop IOC at $62.00
Chart of IOC
FCX - Freeport McMoran $73.77 (Naked Put Write)
Copper prices rebounded +7% last week and FCX is pressing upside resistance at $74. Premiums are still high for the $65 put so I think it is worth the risk.
Sell March $65.00 PUT FCX 10O65 currently $1.40, Stop FCX at $68.85
Chart of FCX
RIMM - Research in Motion $71.32 (Naked Put Write)
RIMM has broken out of its basing pattern and through resistance at $68. It appears to have overcome the depression caused by the Apple iPad news.
Sell March $65.00 PUT RIMM 10O65 currently $1.15, Stop RIMM at $67.50
Chart of RIMM
February Recommendation History
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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)