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Market Update

Market Update

Hello Smart Option Sellers! As we have a long weekend ahead of us, I just wanted to send out a quick update. Next week we'll see earnings season really start to kick in. I plan on going through the list each week to find any viable unofficial earnings plays that can continue to pay off for those of you who choose to partake. So far it's been pretty profitable. We started to see the market come off a bit this past week. This is a good thing as we need stocks to take a breather and get back to more "normal" ups and downs. It's healthy for the market to pull-back now and then as it takes the froth out of the system. This can help avoid those dramatic huge waves of selling that induces fear and panic. If the selling is gradual from time to time as it should be, then it makes investing that much easier. As far as our current and pending positions - keep holding as-is and keep working unfilled orders as GTC (good-til-cancelled). Friday Q&A Q: Lee, who are the people on the other side of our trade, and why would they pay for options that are so far away from the current price of the stock? Seems as if they're giving money away. A: This is one of the most popular questions I receive from new members, and one that's hard for them to wrap their brain around at first. First off, let's thank our lucky stars that these people actually exist! They've helped line my pockets (and yours) for long periods of time. Without them, there'd be no put-sell market for us to trade in. There are really two reasons for other investors to buy put options. 1. Outright speculation. This is our saving grace. Other investors believe that a stock is going to fall and they think they know when and where it's going to fall to. This is the hardest part about buying options. In order to be successful, you have to be absolutely sure to get both the direction and timing correct with your prediction. If you don't, the option expires worthless and you'll lose 100% of your investment. This is why we as option sellers have such high win rates, typically 90% or greater. Option buyers are wrong most of the time, as the stock never gets to their intended target within the expiration time frame. But to them, since they think options are relatively cheap ($.35 to $.50 in our trades), they probably don't care about losing the $35 to $50 per contract if they are wrong. That's why option buyers keep coming back. They hope for the big score and are willing to pay for those cheap options. Think about the Target and LULU options that some of you bought for huge gains. That's what all option buyers are hoping for every time. Unfortunately it doesn't happen. Remember the probability calculator I discussed in one of last week's alerts? It showed the Gap, Inc. (GPS) put-sell position that we're trying to enter had a probability of profit of over 93% for us. Most option buyers don't have a clue about those probabilities. As long as the option is cheap, they don't really care about the probabilities. Hey, more wins for us. 2. Portfolio hedging. Many investors have long stock positions in their accounts and are setting stop-out levels in order to lock in gains or stem potential losses. For instance, let's say someone bought a stock at $25 per share and it's now trading at $50 per share. If they want to preserve their built-in gains, they can choose an area in which to sell. They can do this by buying put options at strike prices that correspond to their sell point. If the stock is currently at $50, they may choose to buy a $40 put option. If the stock falls below $40 by expiration, they will be able to exercise the put option and sell their shares at $40. In most cases, if it's a quality stock, chances are probably slim that it will fall below $40. But for us, potentially buying this quality stock at $40 while it's currently at $50 would be a great trade. So what do we do? We sell that $40 put option, collect the cash, and wait to see where the stock ends up at expiration. If it's below $40 at expiration. then we get to buy it at $40 and the other person fulfills their stop-out and sells it at $40 and locks in their long-term gains. It's hard to say what percentage of option buyers are either speculating or hedging. There is no data that exists (as far as I know) that gives the breakdown. But in my opinion, and based on my experience within the option's trading world, I believe the majority of trades are done for pure speculation. This is better for us as most option speculators choose trades with very low odds of winning. 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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