Frequently Asked Questions
Q: What are the Smart Option Seller and Vertical Spread Trader?
A: Those are Lee Lowell's two option-selling newsletters - both delivered via email.
Q: What do I get with the newsletters?
A: Lee usually sends out 1 to 3 email "Alerts" each week, consisting of either new trade recommendations, position updates, market commentary, & Friday Q&A sessions.
Q: What are the cost of the newsletters?
A: We offer two payment options for each newsletter. The Smart Option Seller monthly plan costs $89 and the yearly plan costs $795. Vertical Spread Trader is $119 monthly and $1,195 annual. Either payment option receives the same content.
Q: What is put-option selling?
A: Put-option selling is an option trading strategy that Lee has used during his 30-year trading career to a very high success rate. It involves selling put option contracts on high-quality stocks as a means of collecting current upfront income while obtaining the opportunity to buy those quality stocks at much lower prices than where the stock currently trades. See Lee's "Put-Selling Basics" guide by either navigating from the top menu or by clicking here:
Q: How many trades does Lee offer in each newsletter?
A: Typically, Lee will issue anywhere from 1-3 trades per month, with an average of 20-24 trades per year. This of course is all dependent on market conditions.
Q: Is put-option selling risky?
A: Everyone has their own risk threshold. Selling put options gives the ultimate control over which stock to choose and at which level you'd like to potentially buy that stock. With that said, selling put options can lead to buying great stocks at great prices. But of course with any investment there is risk. In this case, the risk is that the price of the stock declines while you hold it. It is no more risky than any other buy-and-hold strategy. Lee always stresses, "stay within your comfort zone".
Q: How much money do I need to get started and what size trading account do I need?
A: The amount of money you start with is entirely up to you. Although we recommend having about $10,000 as a base, it doesn't mean it will all be used at once. Our recommendation is to always use 1 (one) option contract when getting started. This will help you understand how the strategy works with the smallest amount at risk. As you get more experienced, you can scale up your position size. Each put-sell position that Lee recommends will require a "margin requirement" that is equal to roughly 20% of what it would cost to buy 100 shares of the underlying stock. The margin requirement acts as collateral and is set by your broker. For Vertical Spread Trader, the the risk and margin requirement are always capped and known ahead of time. Talk with your broker about their margin requirement for selling put option contracts.
Q: What is a "margin requirement"?
A: Each put-sell position that Lee recommends will require a "margin requirement" that is equal to roughly 20% of what it would cost to buy 100 shares of the underlying stock. The margin requirement acts as collateral and is set by your broker. Talk with your broker about their margin requirement for selling put option contracts. Since you are not actually buying the stock outright, your broker doesn't ask you to pay for the stock in full. A "normal" margin requirement would be roughly 20% of what it would cost to buy 100 shares of your chosen stock. This money needs to be available in your trading account at all times and can fluctuate higher or lower depending on which way the stock moves. And as mentioned above, selling option spreads has a defined and locked-in margin requirement
Q: What kind of account do I need to sell put options?
A: Great question! In order to sell "naked" put options (Smart Option Seller) or put-option credit spreads (Vertical Spread Trader) with your broker, you will need an approved option-selling account with margin capabilities. You will most likely have to fill out an extra form to get this started. By selling put options in a margin account, you are using your funds in the most efficient way. In the question above, by using margin, you will only need to hold aside about 20% of the full cost of the stock while the trade is active. Now, this only applies to margin accounts. If you try to sell put options in a "cash" account or an IRA account, you will not get the benefits of using margin. You will be required to put up 100% of the cost of the stock at the outset of the put-sell trade. That is not ideal and it is Lee's recommendation to use put-selling activities in a margin account only.
Q: How many shares of stock is there in an option contract?
A: An option contract is equivalent to 100 shares of stock. The smallest amount of option contracts you can trade is one (1) contract, which equals 100 shares of stock. You can trade any amount of contracts that fit in your risk tolerance and account size. Five (5) option contracts equal 500 shares of stock and so on. Our recommendation is to always start with one option contract until you understand how they work.
Q: I don't understand, someone will pay me money to sell a put option contract?
A: Yes, that's correct. When you sell a put option contract, the person buying that contract from you (the put option buyer) pays you an upfront fee that is yours to keep and do whatever you wish with. You will never have to return that money. That fee is called the "premium" and is set by supply & demand of the marketplace. In exchange for you receiving that fee is your agreement to buy shares of that underlying stock sometime in the future (expiration date). You always get to decide which stock you want to sell the put options on and decide at what price you will potentially buy the stock for at expiration day. You have total control.
Q: It sounds too good to be true. What's the catch?
A: There is no catch. You sell the put option, you collect the cash, you agree to buy the stock in the future if called upon to do so. There are no surprises. You either get to buy the stock or not. But you will always get to keep the upfront payment given to you by the put option buyer.
Q: Am I assured of buying the stock I want at the price I want?
A: No. Part of the agreement of selling put options is that the stock has to be trading at a certain level by expiration day in order for you to buy the shares. For instance, if you sell a $50 put option contract (called the $50 "strike price"), on a stock that is currently at $70 per share, you would need that stock to be trading for $50 at expiration day in order for you to fulfill your agreement and buy the shares. This means the stock would have to fall $20 per share by expiration day. If the stock doesn't fall to $50 by expiration day, your position will expire but you get to keep the premium the put option buyer paid you. That's your consolation for not being able to buy the shares. You could now repeat the process and sell another $50 put option until the stock happens to fall to $50 sometime in the future.
Q: What's a "strike price"?
A: The strike price is the level upon which you and the put option buyer agree to exchange the shares of the stock in the future. See above example.
Q: Do I have to wait until expiration to close my position?
A: No, you can close out your option position (for a profit or loss) at anytime you wish. You see, selling an option contract can be an investment too. When you initially sell it, you will receive a certain of money for it (the premium). If you wish, you can then buy that same option contract back in the open market for a cheaper price, which will lock in a gain and close out the position completely. This is Lee's preferred method of making money in his newsletters.
Q: How much money can I make?
A: Well, there's no simple answer to that as there are many variables involved. It depends on your account size, your risk tolerance, the number of option contracts you trade, etc. But, as a ballpark, Lee aims for very conservative trades that yield roughly $30 in your pocket upfront for each put option contract or spread that is sold. We use a hypothetical 10-contract trade for each position which gives an immediate cash infusion of $300 per position. Some members trade more than that, some trade less. Multiply that by 20-24 positions per year and you can get an idea of how much money can be made. We have members who trade one contract and others who trade 100 contracts at a time.
Q: What kind of returns can I expect with selling put options and option spreads?
A: Computing returns when selling options is a bit different than when buying stocks. Your typical ROI (Return On Investment) is easy to calculate when you buy a stock at one price and later sell it at a different price for a profit. When selling options as your initial transaction, you are not "investing" any money in the trade per se. You are required to have a "margin requirement" which is a small amount of collateral you need to keep in your account at all times while the trade is active. So in order to find your return when closing out the put option trade (by buying it back or letting it expire), you would need to divide the gain on the option trade by the amount of margin you needed to put up at the outset of the trade. We call this the Return On Margin (ROM). For instance, if you sold a $50 put option for $40 premium, and your margin was $1,000 (20% of the cost of buying 100 shares at $50 each), your ROM would be 4%. This is calculated by dividing $40/$1,000 = 4%. Since most of Lee's trades last anywhere from two to five months in duration, you could execute a few of these trades in a year, and with compounding, your returns could roughly be anywhere between 10% - 24% per year.
Q: What kind of holding period are Lee's positions?
A: Most of Lee's trades last between two to five month's time.
Q: How can I sell an option without owning it?
A: In the financial markets, you can trade from the short side as well as from the long side. Options trade just like stocks, and you can initiate an option position from the sell-side first. It's just like shorting a stock. You can sell first, buy back second. It's just reverse of what most investors are used to doing. It is very common.
Q: What happens if I want to get out of the trade?
A: Options are very easy to trade in and out of. You don't need to hold the trade until expiration. If you want to exit the trade, all you would need to do is buy back the same put option or option spread at the prevailing market price. Depending on that price, you may incur a profit or loss.
Q: Why are the probabilities of winning so high when selling option contracts?
A: If done a certain way, selling options can yield extremely high probabilities of winning. In Lee Lowell's newsletters, he aims to stay within the 90%+ range for winning his trades. The reason why selling options can attain these results is because it's very hard for option buyers to guess correctly where a stock is going to move to within the expiration period. It's too difficult a task. Selling options takes advantage of that difficult task. Sticking with selling deep out-of-the-money strike prices is a big part of the winning formula. Read Lee Lowell's Put-Selling Basics to get a better understanding of the probabilities.
Q: Why would someone be willing to pay me cash to buy shares of stock at a cheaper price? What's in it for them?
A: The put option buyers have two reasons for this. One, they are outright speculating that the price of the stock is going to fall and buying put options is a way for them to make money. If the stock does in fact fall, the price of that put option will rise, and they will be able to sell it for a higher price, thus locking in a profit. In order for them to enter that trade, they have to pay you an entry fee (the premium). Along the same lines, the put option buyer may want to hedge a long stock position they already have in their account, and they are essentially setting a sell price (profit level) for themselves. If the stock sells off and reaches the strike price, they can sell (put) the stock to you and make you buy the shares. Either scenario creates an income opportunity for you as the option buyer always has to pay you the entrance fee to make the trade (pay the premium to you).
Q: Lee, you talk about possibly buying the shares at expiration but you also talk about closing the position early before expiration. I'm confused. Do we wait until expiration to see if we get to buy the shares or are we closing trades before expiration? Seems like there's more than one way to see the position through. Can you explain more?
A: Yes, good question. There are actually a few ways to handle the put-sell position as far as ending the trade.
1. We can hold the trade all the way through to expiration. This will allow us to see if the stock price ends above or below the strike price.
If it ends above the strike price, the put option will expire worthless and you keep the upfront cash. You will not be able to buy any shares at the strike price level.
If the stock price ends below the strike price, you will be required to fulfill your agreement to purchase the shares. This is great, as you get to buy the stock at the price you've chosen. But, it also reflects one of the risks we described above in which the stock can fall below your buy-in level. This may be temporary though, as many stocks can easily bounce back and become profitable.
2. We can also close out trades early before the expiration date. There's no rule that says you have to hold option trades until expiration.
In this case, we look to buy back the put option (or option spread) at a cheaper price than what it was originally sold for. Sell high, buy low (in that order). We employ Lee's "80% Rule" in regards to buying options back early. Read about it in his "Put-Selling Basics" guide.
Q: Can you recommend a few brokers to help me get started?
A: With the recent announcement in October 2019 by Charles Schwab that they are eliminating and reducing commissions, most options brokers are now very cheap. Option fees have been reduced to $.65 per contract. That's amazing!
Look at brokers such as:
https://www.interactivebrokers.com/en/home.php - Interactive Brokers
https://tastyworks.com/index.html - Tastyworks
https://www.thinkorswim.com/t/innovation.html - Think Or Swim
http://www.schwab.com - Charles Schwab
https://www.tradestation.com/ - Tradestation
https://us.etrade.com/home - E*Trade
Some of these brokers have been bought out by larger firms so check the website for current information. Lee Lowell has no affiliation with any of these companies and is providing this information as a benefit to his readers.
More questions are added as they come in.