Here We Go!
Here We Go!
Hello Smart Option Sellers! Welcome to the inaugural issue of our newsletter - The Smart Option Seller. This is an historic day for me (and you!) as it represents the beginning of a great new relationship between all of us and the beginning of a great new journey. I'm so excited to have this as my own, and to get back to what I love doing most: helping people profit and learn about the awesome world of put-option selling. For many of you, this won't be much different than before. The format will mostly be the same - you'll get new put-sell trades from me, updates on current positions, market commentary, and the Friday Q&As. No reason to mess with success. A few ground rules: 1. In order to get the best possible fills, I implore you to stay within the range of option prices I recommend for the trade. 2. Stay within your comfort zone. Do not sell more option contracts than what you'd be comfortable owning if assigned on the shares. Remember, each option contract represents 100 shares of stock. 3. Our model portfolio will consist of 10-contract positions for each stock. 4. In order to use your money most efficiently, try to execute these trades in an options trading margin account. That way, you will get the normal 20% margin treatment from your broker. 5. Have fun! Of course, I will always offer more advice and tidbits along the way on how to make money from put-option selling. So with that said, let's get to it! What's New? No doubt a lot has happened since we last chatted back in July 2016. The biggest of all is how the presidential election has moved the market. Since that day on November 8, the Dow Industrials has gained almost 2,000 points, propping it up, and allowing it to end 2016 with a 13% gain for the year. Pretty impressive. Along with those all-time highs (same for the NASDAQ), the VIX has dropped to scrape across multi-year lows. Why do I bring up the VIX? Because it's extremely relevant to us as option traders. If you've been with me for awhile, you know I like to talk about volatility in the marketplace and how it affects us. To recap, the VIX is a measure of volatility and fear in the market, and it has a direct impact on the pricing of options. When the VIX is low, there is lots of happiness and complacency in the market. Why is that? Because the market is moving higher. When that happens, the VIX moves lower. When fear and panic is high, the VIX moves higher because the market is selling off. So where are we now? The market is high and the VIX is low - not the greatest place for option sellers. Since volatility has a direct impact on option prices, we want high volatility. This will pump up the option prices and allow us to sell them at inflated levels. That's good. But right now the VIX is near all-time lows, bringing option prices down in the process. That makes us unhappy. Look at the chart below which depicts the Dow hitting all-time highs near 20,000 and the VIX sitting near multi-year lows at 11.23.
Chart courtesy of Stockcharts.com You can see that each index is almost a mirror image of each other. So this is the current state of the options market - low volatility and low option prices. How do we know low volatility leads to low option prices? Easy. We consult an option calculator.
In the two images above, I compare a Microsoft (MSFT) $50 put option that expires in June 2017. In the top image, the put option is valued at $.49 (circled) which carries a current volatility level of 27% (left-side). In the second image, I bumped up the volatility input 3 points to 30%, which would be a very common jump when volatility moves higher. You can see the value of that same put option is now $.70, giving it an increase of almost 43%. That's huge! Clearly, we as option sellers want more volatility in the market when we enter a put-sell position. It puts more money in our pockets. How do we get it? We need a good old fashioned rout in the market. Nothing earth shattering. Just a solid pull-back from these all-time highs, something to get people a little panicky about. That would spike the volatility a bit and then we can sell our put options. And then just like clockwork, the market can move back up again and give us profits. Wash, rinse and repeat. That's all we need. So that's the lesson for today. Keep an eye out for the next alert later this week. Housekeeping Don't be alarmed if you see different versions of these email alerts. I'm still tweaking the design. We're also going to institute our text messaging system again. If you'd like to be notified on your mobile phone when a new alert is about to hit your inbox, join our text alert system by typing in your name and mobile number here: You should then receive a welcome message from me. You can disregard the message that states how many messages you will receive per month. That's just for legal purposes and has no bearing on how many messages you'll actually receive from me. All other text messages you receive will just be a head's up that a new alert is about hit your email. All alerts will be archived on the website and everyone will receive a password in upcoming alerts on how to access that member's-only area. As always, if you have any questions, comments or feedback, please let us know. I would appreciate just for today to shoot me back a message letting me know that you received this alert. I don't want anyone being left out. Thank you! You can contact us here: It's good to be back. Regards, Lee