The stop crushing drop after the Consumer Confidence report this morning eliminated many of our positions.
That was a very painful drop this morning. After the big day we had on Monday, at least for our plays, I did not raise the stops on the new positions. Today's single candle drop not only hit the raised stops on our old positions but several of the entry-level stops on our new positions. The CMG and NOV positions were a loss for a total of 80-cents.
The biggest pain came from the -$6 decline in IOC on Monday. The stock opened at $68 and blew through our stop at $64.75 to spike the premium on the $60 put to $3.80 even though we were still $5 out of the money. That cost us $1.25. That was pretty severe when the stock opened $8 out of the money and we stopped at $5 out of the money. The market maker nailed us on that one.
I tightened up the stops on the remaining three positions to take us out on any further market declines.
Here is the aggressive paragraph. While I am not sure today was a one day wonder in terms of a sell off, I did look at about a hundred charts and picked out some plays in an attempt to recover some money while the March option cycle is still young. Since the market ended with a triple digit loss the put premiums are elevated. I am going to add a few plays purely on the hope that this was a one-day event. I am going to request that you not enter these positions until after 10:AM and the S&P is positive. In theory that would rule out any opening dip to support. If we do get an opening dip and a rebound that would be the best scenario.
Check the graphic for the new stops on existing plays.
CLF - Cliffs Natural Resources - $52.71 (Naked Put Write)
Cliffs has already reported earnings that were decent despite some one-time charges. Cliffs garnered several upgrades and has been moving higher for the last couple weeks. Tuesday's decline was -1.77 and given the +$15 gain over the last couple weeks that was a minimal loss. It could be seen as a dip to buy if the market cooperates.
ENTER ONLY if CLF is positive, and S&P is positive any time after 10:AM.
Sell MAR $50 PUT CLF 10O50 currently $1.85, Stop at CLF $51.75.
Chart of CLF
CLR - Continental Resources - $38.57 (Naked Put Write)
A big two-day drop on CLR has taken it back to support at $38. Because of the two-day drop the $35 put has decent value. This could be a sell and forget play although it does depend on what natural gas does this week. Still support at $38 should hold or at least slow an additional drop.
ENTER ONLY if CLR is positive, and S&P is positive any time after 10:AM.
Sell March $35.00 Put CLR10O35 currently $.65, Stop CLR at $36.85
Chart of CLR
POT - Potash Corp $110.18 (Naked Put Write)
POT was hammered by the lack of customer financing for fertilizer in 2009 but the farm economy is recovering worldwide. You can take a field off fertilizer for a year, maybe two but the yields will start dropping fast. With the world population still increasing and the recovery starting to show signs of life the interesting POT has been increasing. The recent acquisition of Terra for $4.1 billion and Vale's acquisition of the Bunge Brazilian fertilizer business suggests the bottom is behind us. I realize that is a lot of justification for a short-term play but that is what is moving the stock today.
ENTER ONLY if POT is positive, and S&P is positive any time after 10:AM.
Sell March $105.00 PUT POT 10O105 currently $2.49, Stop POT at $108.50
Chart of POT
FWLT - Foster Wheeler $26.81 (Naked Put Write)
Foster has decent support at $26 and a decent premium at the $25 strike. The stock has been depressed and could appear as a bargain if the market decides to move up again. Just staying at $26 would still yield a decent profit.
ENTER ONLY if FWLT is positive, and S&P is positive any time after 10:AM.
Sell March $25.00 PUT FWLT 10O25 currently $.65, Stop FWLT at $25.75
Chart of FWLT
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)