We came really close to exiting January with a profit despite the dozen of so days of high volatility and gap open markets.

We were successful in exiting the IOC position for 50-cents on Friday with a $2.50 profit on the trade. That brought our net loss on closed positions down to -3.36 for the month.

$2.73 of that came from only two positions. The Freeport McMoran gap down open on the 12th cost us $1.43 and the gap up on the DIA short call on the 13th cost us -1.30. We lost .98 on the long DIA put as well.

The majority of our losses this month came from premature entries in expectations for a market decline. Instead of declining the markets rebounded and stopped us out on several positions.

It was a rocky month for me and I take full responsibility for being early on the setups expecting the market to decline. They say timing is everything and missing by four days was painful.

Fortunately once the market did begin to decline we were able to pick up some decent positions to offset those losses. If we had closed all our positions on Friday we would have been profitable for the month.

February is setting up to be a good month because the market is finally directional again. I personally believe we will see some further declines and once a bottom is found we have the potential for several months of positive bias.

Finding that bottom could be tricky. With so many guidance disappointments traders are rethinking their long positions. The next 4-6 weeks could be choppy until traders start setting up for the Q1 earnings cycle. Unfortunately Q1 is not normally a strong earnings quarter so it will depend on mid quarter guidance from the big names to give us some direction.

I am not adding any new positions today because the market is short term oversold and we could see a bounce on Monday although closing on the lows on Friday is not normally a good sign.

Check for new stops on existing positions.

Jim Brown

Current Portfolio

Current Recommendations

None Today

January Recommendation History

Long Puts

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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.

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)