Position Updates And Friday Q&A
Position Updates And Friday Q&A
Hello Smart Option Sellers! Lululemon (LULU) Congratulations to those of you who ventured into the unofficial LULU earnings play. By the end of the day, the stock had dropped over $15 per share. That was even more than I had expected, but welcomed nonetheless. Not that I was hoping for the stock to drop. We would've been happy with a $15 pop as well. As long as there was big enough movement either way, the strategy would work. The end result handed some of our members anywhere from 1,400% - 1,800% returns in less than 24 hours. Put options bought from $.30 - $.60 per contract were sold for $7.00 - $8.00 per contract, netting thousands of dollars in profits. If you're still holding any contracts on LULU from yesterday, remember to exit all trades by the end of today. I will continue to search for these trades as long as everyone still wants it. Portfolio Update We currently hold put-sell positions on: Target (TGT) Verizon (VZ) General Mills (GIS) Purefunds Security ETF (HACK) Merck (MRK) Intel (INTC) All positions are in the black and moving in the right direction (getting cheaper) except for TGT which is currently just a few pennies above our entry sell price. The stock has popped a bit in the last few days which has brought the put option price back down. That's a good thing. The keys for us in profiting with put-selling is three-fold: 1. The stock price meanders around or moves higher. 2. Time ticks away (time decay). 3. Volatility in the stock falls. Usually, it's the stock's price and time decay which are the biggest helpers for us. I try to pinpoint stocks which I feel are on the cusp of moving higher, which in turn moves the put option prices lower. And, choosing expiration dates from two-five month's in duration can help speed up the time decay, which also helps erode the put option price. Continue to hold all positions as-is. Friday Q&A Q: What is the tradeoff / consideration, in selling 10 put options for $0.30 ... or 20 put options, with a strike further out of the money, for $0.15 ? Both will have the same result dollar wise at expiration. A: Yes, both will yield the same dollar amount in money collected at the onset of the trade - $300. One of the things to take note here is that you're potentially putting yourself at risk to have to buy double the amount of shares if called upon at expiration - 1,000 shares vs 2,000 shares. The other issue is that most likely your margin requirement will be larger if you sell more contracts. You would need to make sure you have the available funds to do that trade. On the flip side, selling 20 contracts of the further out-of-the-money strike gives you a little bit more downside protection if the stock starts dropping. It's a trade-off. I'm not saying that you can't do it. Just make sure you're aware of the potential risks involved, most of which is taking on a larger position. Q: What happens to options if the company files for chapter 11 before expiry date of the option? A: A good source of information on topics like this is to visit the Options Clearing Corp's website at www.theocc.com The OCC is the governing body over all options trading in the U.S. From what I know, once a company files for chapter 11, all stock & options trading comes to a halt and then gets moved to the OTC market. Most likely the stock will be pretty close to zero, so all previous options contracts will be priced based on that assumption. Call options will be worthless and put options will have full value. If you were a put seller on a stock that has declared bankruptcy, then you will be looking at maximum loss potential. But, let's look at this scenario more closely. In most cases with troubled companies, the writing is on the wall long before they file for chapter 11. The news will be out there for some time that the company is having difficulty and you will see a slow bleed of the share price over time. This is your clue to get out of a trade if you stand to lose if the stock drops. My take: you will have a period of time to get out trades on a failing company because the news will be widespread enough for you to be in the know. This is your time to take action! One of the things I always stress when selling put options is to concentrate on solid blue chip companies with very long histories of outstanding performance. This will help keep you protected. Thanks for the questions. Well, that's all for today. Have a great weekend. You can always contact us here. Regards, Lee Let's Grab That Cash!
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