Trade Update
- Issue #19 | By Lee Lowell
- Feb 22, 2017
- 5 min read
Trade Update
Hello Smart Option Sellers! Before I get to the alert, don't forget to read my new "Put-Selling Basics" guide I have on the website. It's a great refresher for both experienced and new traders. It's totally free. Just click here to read. We're filled on our first buy-back (profit) order on Bristol Myers Squibb (BMY). If you entered the order yesterday (and today), you should be filled at my recommended buy price of $.07 per contract. Some of you may have even been filled at $.06 per contract. Here's what we did: Bought back (bought-to-close) all of the BMY June 2017 $38 put options for an official buy price of $.07 per contract as a closing transaction (bought-to-close). Let's go over the results: We originally established (sold-to-open) this put option on January 26th for a sale price of $.45 per contract, and now we took gains by buying it back (bought-to-close) for $.07 per contract. With the fill at $.07, it locked in a gain of $0.38 per contract ($38 for every contract traded) and a return on margin (ROM) of 5% in under one months' time. Short and sweet, just the way we like it. For those of you who need a refresher on margin - let me explain. Whenever we sell an option contract, your broker requires you to maintain a "margin requirement". The margin requirement is just part of your account funds that need to be held aside while the trade is active. You are not borrowing money from anyone nor are you paying margin interest to anyone. The margin requirement is typically 20% of what it would cost to buy 100 shares of the stock at the strike price. In this case: 20% x $3,800 = $760. So our margin requirement is $760 per each put option contract sold. Our profit on this trade is $38 for every contract sold. The return on margin (ROM) comes out to $38/$760 = 5% in one months' time. Not bad at all. For those of you who like to annualize: that's a cool 60% return. The fill at $.07 also allowed us to capture 84.4% of the full profit potential ($.38 gain/$.45 full potential = 84.4%). We like to close trades early before option expiration when we can capture at least 80% of the full profit. It's called my "80% Rule," and it's just smart trading. It's also a great way to preserve capital to employ towards a new trade. If you haven't closed this trade yet, or didn't get a chance to place your order yesterday, you should have no problem getting filled at the same prices. Great job, everyone. First successful trade under our belts. Bet sure to let us know how you did. You can reach us here. And for those of you who wondered why the price of BMY stock surged near the end of the trading day yesterday - it was because Carl Icahn took a stake in the stock an mused that it was a great takeover target. Talk about "talking up" your position... General Mills (GIS) We're still holding our put-sell order on GIS as a "GTC" order for now. I know I may be being stubborn on this one, but I want to give it a few more days. Here's a question that came in about it: Q: Why are we messing around with GIS July $47.50 in the range of .34 to .39 per contract, when we can do 1.42 to 1.65 with July 55.00? As I write this GIS is at $59.23 /shr. I think a 4 pt difference is good enough with 5 months to go. I’m new at this - what am I missing ? A: Great question. After you've been with me for awhile, you'll understand I am extremely cautious and conservative with our trades. If we're ever going to have to buy a stock, I want to make d*mn sure we get it at an incredible price. To me, $47.50 per share is the highest I would pay for GIS at this moment in time. With it currently hovering around $60.42 per share as I type, that's a nice 20% decline it would have to travel by expiration. It also coincides with the lows it made in 2013. Think about it: the stock just dropped $5 per share in just the last three trading days alone. What makes you think it can't drop another $5 in the foreseeable future? It can, and that's why I play it safe. I always tell my readers that you are free to choose whatever strike price you wish if you want to deviate from my recommendation. I'm fine with that. Just know, you may end up buying the stock. If you're cool with your price level, then I'm cool with it too. That's all for now. You can always reach us here. Regards, Lee Let's Grab That Cash!
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