The morning decline knocked us back to cash when BIDU hit our stop.

The morning dip was bought but not with enough enthusiasm to really erase the negative sentiment over China. At least that was the excuse everyone was using for the decline. I believe it was just an excuse for profit taking after the initial earnings reports left a lot to be desired. That was especially true of the banks with the exception of Morgan Stanley. Without the banking sector it is really hard to keep a rally moving higher.

Baidu hit our stop at $104.95 for a minor loss and we are back in cash. If this decline continues through Friday we can start looking for some new entry points. I just want to avoid jumping in early. We can have the right idea but if the timing is wrong the result could be ugly.

We are going to let the market tell us when it is done declining. The Russell declined to strong support at 780 but then closed under that level by two points. A further breakdown there would be a warning the market is not ready for bottom fishers to go to work.

I received an email from a reader last night on the VMW option price I reported in yesterday's newsletter. I get this question a lot so I am going to reprint the answer here.

Jim, I was filled at a different price when I closed the VMW position on Wednesday. My price was $2.85 compared to the $2.60 you reported. Am I doing something wrong?

Reply: Eric, I get this a lot. There are multiple reasons why different people get different fills. These options are carried on different exchanges and while in theory they should all be close in price there are some differences.

There is also the problem of market depth. The Bid/ask may only be 2 contracts deep with a higher price on the next 3 and then the next 5 and so on. The prices shown on the quote pages are the "best" bid and ask. That does not mean there are not dozens of other limit orders spaced out on both sides of the best bid/ask.

On that VMW strike on Wednesday there was a volume traded of 339 and more than twice normal volume. I have no way of telling how many readers were playing that position but even at a small number like 10-15 readers that could have been a lot of contracts. When the stop was hit and all the buy-to-close orders triggered at exactly the same instant I am sure the best bid/ask block was cleared almost instantly and the remainder filled at higher prices as the market depth was eliminated. Remember we are not dealing in thousands of shares but in tens to hundreds of contracts in volume.

Lastly, as stated in the Option Investor disclaimers, none of the writers are allowed to actually trade the positions they recommend in order to avoid SEC worries over front running the trades. If you read other newsletters you will find the same thing. The SEC came down hard on newsletters over the last ten years and none of us want to go through the SEC torture so we prohibit writer trades.

Since I don't actually have that position in my account I have to go by the bid/ask when my alarm goes off. If I am not sitting in front of my computer when the stop is hit then I rely on the CBOE and their price charts.

VMW hit $94.25 at 12:48. The CBOE chart for that option showed a spike from $2.60 to $2.80 between 12:45 and 1:PM. I am pretty sure that spike had a lot to do with Option Writer readers being stopped out. You have to admit it looks a little suspicious. Volume in that strike was more than double any day in the last week. Of course VMW was declining so you would expect more volume.

CBOE Option Price Chart VMW Feb $90 Put

Also, I don't know how quick your broker is in executing option trades based on the price of the stock. I also don't know if your broker is paying a fee for order routing that gets tacked on to the price.

Thank you for bringing this to my attention. As I have always stated in the past I will use a reader execution whenever available as the official price for record purposes. I will update it in the Thursday newsletter and use your $2.85 price.

Jim Jim Brown

Current Portfolio

Current Position Changes

BIDU - Baidu (Stopped out)

BIDU hit our stop at $104.95 at 10:50 this morning with the option trading at $2.60. That represents a 45-cent loss on the position. Given the decline in the Nasdaq this morning I believe we were fortunate to escape with a minor loss.

New Recommendations


New Long Term Recommendations

None - Waiting for a "real" market dip

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Margin Requirements:

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)

Prices Quoted in Newsletter

At Option Investor we have a long-standing policy prohibiting the editors and staff from actually trading the individual recommendations in order to conform to SEC rules concerning trades.

The prices quoted in the newsletter are the end of day prices in most cases.

When discussing fills or stops the prices quoted are the bid/ask at the time the entry trigger or exit stop is hit. This is NOT a price that someone on staff actually got using a live order.

For entry/exit points at the market open the prices quoted will be the opening print. The majority of the time the readers are able to get a better fill than the opening print because of market maker bias at the open.

For trades with an opening qualification the prices quoted will be the bid/ask at the time the qualification was met.

All of these rules normally produce worse prices than an active trader would normally get. Because they are standardized there may be some cases where a price quoted was better than an actual fill. If you received a price that was dramatically different than what was quoted please let us know.