Friday Q&A

Hello Smart Option Sellers! Before I get to the questions, let me make a quick comment on today's two new put-sell trades on Procter & Gamble (PG) and Colgate Palmolive (CL). Both option prices went quickly right to the low end of our sell price range of $.25 per contract. Although I thought we'd be able to sell some at $.25 per, no one was biting. A little frustrating, I understand. Let's give it another day or two and see how it plays out. As I've mentioned a few times before, options trading takes a little more patience and finesse sometimes. Since option prices are very dependent on the stock's price, we would need a quick blip down in each stock to help our cause. Let's reassess early next week. Friday Q&A Q: Re: 80% Rule. After a trade is completed, wouldn't it be a good idea to place a limit order to Buy to Close your position once it declines to 20% of it's original value? Therefore locking in a profit of 80% in each position. A: Good question, and this relates to my 80% Rule which states we look to take profits on a put-sell play if the put option declines in value by 80%. Yes, you can certainly place your buy-back order as soon as you're filled on the sell-to-open order. It's a smart move as a "set it and forget it" trade. But, there's a reason why I don't like to do that. Once you set your GTC buy-to-close order, it's out there for the market-makers to see, and they know you're waiting there with a bid in the market. It can actually work against you as far as time-wise. Let's say you sold a put option for $.35 per contract and then place a buy-to-close order for $.05 bid. The market-makers will see your $.05 bid sitting there and will try their hardest to keep you from being filled for as long as possible. Why? Because they can "lean" on your order and use it as a crutch. Since most market-makers will take an opposing position in the stock after they make an option trade, they can give themselves better stock prices fills knowing that your bid is there to protect them when they need to sell to your bid price. In contrast, if no bid or buy-to-close order is resting in the marketplace, the market-makers are more apt to sell the option at fair value prices at the appropriate time. This is why I'd rather wait to see a $.05 offer come into the market and buy it at that time, instead of me showing my hand with a $.05 bid. You want to be as stealthy as possible, as that helps you get the best possible fills. I hope this makes sense, but placing the buy-to-close order is still fine to do, especially if you don't have the time or means to watch your positions on a constant basis. Q: Lee, wouldn't it be smart to buy Amazon or Google options for our earnings plays? Those stocks always make such large moves. I'm sure we could profit on those. What am I missing? Thanks. A: Yes, you would think that would be the ultimate earnings play. But, it actually isn't. If you had checked the option prices for both AMZN & GOOG before their earnings were released, you would've seen that in order to buy cheap options of maybe $.25 per contract, you'd have to go a minimum of $100 radius above and below the current stock price. That's basically asking for those stocks to jump more than $100 per share in either direction after they report. That's way beyond a reasonable hope. Amazon ended up only about $7 per share today and Google was up about $34 per share. Not even close! We would be better served selling those options instead. Hmm...future trades? That's all for today. Continue to hold all other positions as-is and you can always contact us here. Have a great weekend! Regards, Lee Let's Grab That Cash!