Alternating days of triple digit gains and losses on the Dow due to extreme volatility in the dollar, the Dubai debt crisis and the markets struggling at new highs kept us from making a profit in November.
We had several days where our plays were laid out and events overnight crashed the dollar and sent the markets flying with big gaps at the open. That is the worst possible way to enter a naked put play. Option premiums for puts over react to the downside on the opening spike then reinflate when that opening gap fizzles. It was a tough month since the markets only trended for about 4 days at the beginning of the month. The rest of the month looked like a picket fence on the charts.
Still we managed to finish with less than $1 loss for the month and a really good setup for December. We have several plays well into the money and baring a market disaster we should be profitable.
Click here for October Results
Click here for September Results
Click here for August Results
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)