The market is nearing a point where the rally is going to fail. Time to take profits.
The S&P is going to do battle with resistance at 1150 next week and although I expect it to spend some time over that level I believe the rally is due for a bout of weakness. We will probably drop back below 1150 and possibly even retest 1100 in the weeks ahead.
I base this on my view that mutual funds are facing the end of the quarter next Thursday and need to be invested for those end of quarter statements. Once into October they face their fiscal year end on Halloween. They will need to make any remaining portfolio changes to eliminate unwanted positions, throw in the towel on losers and take profits on winners to offset the negative impact of the losers and offset taxes. This normally produces a dramatic dip in October followed by a similar rebound at the end of the month as new positions are entered. We have the added impact of the elections this year and the expected gridlock for the next two years.
I would like to be out of all our positions by Thursday's close. I have raised the stop losses and put in profit targets for exits. I will continue to tighten these stops all week so be prepared to exit. Once we see what the first week of October brings I plan on adding some short and long-term positions to capitalize on an expected year-end rally. I expect the next two months to be our most profitable of the year.
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)