Position Update And Friday Q&A
Position Update And Friday Q&A
Hello Smart Option Sellers! Before I get to the alert, don't forget to read my new "Put-Selling Basics" guide. It's a great refresher for both experienced and new traders. It's totally free. You can find it on the website or just click here to read. Also, it seems many of you are not taking advantage of our phone text alert messaging system. If you'd like to be notified on your mobile phone when a new alert is about to hit your email inbox, join our text alert system by typing in your first & last name and mobile number here: Position Update We've had a pretty successful week as many of you took advantage of the Target (TGT) put-buying opportunity, while our other current put-sell positions are all doing well. As of now, The Gap (GPS), Verizon (VZ) and General Mills (GIS) put-sell positions are all in the black. Our Target (TGT) put-sell position is sitting right near break-even at the moment, depending on what price you initially got in. The stock is currently trading around $57.15 per share, and will probably see some residual selling and/or meandering at these low levels for a bit until the market feels comfortable to step back in and stem the fall. We are still well protected from more downside as our strike price of $45 is another 20% below the stock's current price. Continue to hold all positions as-is. Friday Q&A We finally got a few questions that came in. I like to use Fridays as a day to answer member questions, so if you have any, please send them to us! Q: In your book you explained that trading spreads is your go-to for trading. I believe you tried it with others before. Did it not work out? If so, why not? Otherwise, might this be something on your radar? One last thing, in your book you told the reader that they must have a reasonably good idea on where a stock is heading to put a spread in place but you offer very, very little on how to do that other than just showing an RSI chart. Your comments? Oh yeah, last, last thing. I have kicked myself for not buying the hedge on TGT. Never saw you do that before when you were with your previous publisher. Is that something you see doing rarely, sometimes, or alot? A: Thank you for the questions. 1. When my book was first written, I still had a major concentration in commodity options, and with those having such high dollar valuations, using spreads was a must for risk protection. Most of the examples given in the book entailed my commodity option trades. Selling naked puts on commodities would entail huge margin requirements and huge outlays of cash if assigned, so spreads were a way to minimize those effects. Stocks are different in this regard because the multiples are so much lower. Selling a put option on a $35 stock would entail a potential outlay of $3,500 if assigned at expiration. Whereas, selling a $35 crude oil put option would entail an outlay of $35,000 because a crude oil option contract is composed of 1,000 barrels of oil and stock options have 100 shares of stock for its composition. We had used spreads only sparingly at Instant Money Trader only because we were trying to temporarily protect a position that had moved against us at the time. Since one of our goals at The Smart Option Seller is to take ownership of these quality stocks at very attractive levels, the need to use spreads is minimized. I really don't foresee us using spreads in this service unless it's absolutely necessary. 2. First and foremost, in any kind of trading, whether it's stocks, options, bonds, etc, you need to have an idea of where you think the asset is headed. Otherwise, you're just flying blind. My goal in the book was not to turn it into a novel on how to pick stocks and how to pick direction. It was, and still is, all about options trading. But as you noted, I did give a very brief idea of some of the items I use to help me make my directional assessments for the stock & commodities that I choose. I have charts, indicators, research and experience that I use to pick my stocks, so some things I still keep a little private. Can't give all the secrets away! 3. Lastly, the recent Target put-buy was an opportunity that could not be passed up. As I mentioned in Wednesday's alert, I will always present these opportunities to my members whenever they pop up, but unfortunately I can't guarantee it will be a regular thing. Q: Is time decay(theta) same for both weekly and monthly options? And who gets the dividend while holding the put sell? A: Time decay is the function of an option's price losing part of its value as each day passes. Part of an option's value is derived from how many days are left until expiration. It would make logical sense that, if there are many days left before expiration, time would add a lot more value than if there are only a few days left. This is because when there's lots of time left, the stock has more opportunities to make large moves in either direction. And as time slips away, there is less chance for the stock to move. Option pricing takes this all into account and adds an appropriate value based on the number of days left. Time decay is expressed as "theta" which is an actual number (dollar amount) that can be measured and seen on a daily basis if you have the right tools and software. For instance, the time decay (theta) for an option with six months left before expiration, may lose a penny or two of value from one day to the next. But an option with six weeks left before expiration may lose $.10 of value from one day to the next. The decay (theta) gets larger as you move closer to expiration. I included a time decay chart in the Put-Selling Basics guide that you can view. Use the link at the top of the alert to go right to the guide. So to answer you original question - no, time decay is different for weekly and monthly options. 3. Lastly, only stockholders receive the dividends. Neither option buyers nor option sellers receive anything. Q: Why don't you ever make a recommendation on a Friday? The benefit of doing this would be an extra two days of decaying time value. A second question is since most of the decay in time value occurs in the last 60 days of the option, why not sell options that expire 60 days out? A longer timeframe also means the stock has a longer time to tank and given the stock markets lofty highs, I think a shorter timeframe might not be a bad idea. A: Great question, and this fits nicely with the previous one. It would seem so easy, right? Just sell options on a Friday with 60 days or less until expiration. Problem is, everyone else thinks the same thing. The option market makers on the exchanges basically set the market (bid/ask) for all options and they of course know about time decay and how it's priced in. The weekend value gets taken out of the option prices I would say end of Thursday each week and all day Friday. By the time Friday's session ends, the options are already priced with Monday's value. No free lunch. Same with selling 60-day options. Yes, they erode very quickly, but then it becomes a question of how much less money are you willing to accept for those quickly-decaying options, or how much closer to the stock's price are you willing to choose the strike price? Shorter-term options are worth less money. For example, with a $50 stock, I would like to sell the $40 put options. If I choose the 60-day options, I might only get $.10 per contract for them. But if I choose the four-month options, I can get $.40 per contract for them. Which do you want? Or, I can sell the 60-day options of the $45 strike and get my $.40, but then I just gave up $5 of cushion compared to selling the $40 strike price. It's all a balancing act between how much cushion you want to give yourself vs how much money you want to collect. I stand by my experience which has led me to the best success by choosing two-five month expiration periods and using strike prices that are 20%-30% below the current price of the stock. Of course there are always exceptions, but those are pretty good averages. The option pit players are smart, and they know how to price options correctly. We just have to be smarter. That's all for today. Have a great weekend. You can always reach us here. Regards, Lee Let's Grab That Cash!
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