Trade Update
Trade Update
Hello Smart Option Sellers! Gap Inc. (GPS) We missed by a penny or two yesterday in terms of getting filled on the new GPS put-sell. At the end of trade yesterday, the put option had a market of $.28 bid/$.30 our offer. No one was willing to buy from us at $.30 per contract. I was hoping the market would open weaker this morning to give us a chance to get filled. No such luck, as GPS stock is now $1.25 per share higher this morning, which will put downward pressure on the put option prices (higher stock price = lower put option prices). As I say, I try to pick stocks which I feel are on the cusp of moving higher. I just want us to be able to get into the option trade before the stock makes that move. So for now, the trade stays open and we work it GTC (good-til-cancelled). Option Order Tactics Let's discuss order entry for a minute. With options markets, some strikes have real tight bid/ask spreads of maybe a penny or two wide, while others can have large spreads of anywhere from a nickel to thirty cents wide. I haven't really found a correlation between how liquid the stocks are versus how liquid the options are. GPS stock is a widely traded stock with large volume and its stock trades in a penny wide market. You would think that the options market would be just as tight and have large volume as well. Not the case. GPS options have ten to fifteen cent wide bid/ask spreads. Doesn't make too much sense. How can we handle this situation? Sometimes we need to play with a little more finesse and patience when it comes to options trading, especially if the bid/ask market is wide. When I sent out the alert yesterday, the GPS $16 put option had a market of $.23 bid/$.39 offer, which gave it a fair value of roughly $.30 per contract. I thought we'd be able to get it. My reasoning in yesterday's alert to start our offer price at maybe $.35 per contract, is to let the bidders come up a bit higher to start the negotiating process. Once we immediately took the offer price down from $.39 per contract to our lowest limit of $.30 per contract, we gave up all of our leverage and negotiating power. It didn't allow the market-makers to increase the bid and then allow us to go a little lower, etc, etc. I'm not saying any Smart Option Seller member was the person who took the offer price down to $.30 after the alert came out, but once that happened, we had no more wiggle room. What I'm getting at here is that when it's time to place an option order, let's not start right at the lowest limit price. Let's ease our way down a bit if possible to tell the other players we will haggle with you until we agree on the best price. There are no rules that say you can't alter your option price. You can switch your price as often as you like. In the end, even if we did play it right, we still may not have gotten filled at $.30 per contract. But at least we would've given it the best opportunity. Food for thought. Probability Got a request from a member to put up a probability calculator like I used to show back in The Instant Money Trader days. A probability calculator is a handy little tool I like to use to gauge our chances of a stock falling to a certain level by expiration date. This helps me decide which strike prices to use. Here's the current probability calculator for the GPS trade.
What the calculator is telling us is that GPS stock has a 93.86% chance (see bottom-right box) of staying above our selected strike price of $16 by expiration day. That's also the probability of us being successful with this trade. 93.86% is right in line with the win rate for selling put options like we do. That's an extremely high win rate, which is made possible by picking strike prices in this manner. One of the goals as a put-option seller is to know if the stock will remain above the chosen strike price by expiration. If it does, you can expect full profits. Of course, knowing where the stock will end up months from now is a pure guessing game, as no one has a crystal ball. But using a probability calculator can give you a pretty darn good idea of the stock's chances of getting to a certain area by a certain date. All the inputs that go into the top section of the calculator are the keys to giving you the end results, especially the "Future Volatility" input. That number is based on the stocks past price movement and then projected out to how the stock is expected to perform in the future. Make no mistake, the calculator is not 100% fool-proof. It can't guarantee results or success, but it is a great starting point. If you've read my "Put-Selling Basics" guide on the website, you've seen how the calculator plays a prominent role in our trading. That's all for today. Keep the GPS order working GTC, and continue to hold all other trades as-is. You can always contact us here. Regards, Lee Let's Grab That Cash!
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