Trade Results And Friday Q&A
Hello Smart Option Sellers! Yes, it's Friday! Been a busy week for us here. I've sent out alerts four out of five days this week (is that too much?). Hey, if things are happening in the market, you're gonna hear from me! Let's talk about trade results from yesterday. Procter & Gamble (PG) We had adjusted our sell price on PG yesterday which seemed to get the job done. I saw many orders go though between $.21 to $.23 per contract, so we'll take the official mark at $.22 per. Here's what we did: Sold (sold-to-open) the PG October 2017 $65 put options for an official sale price of $.22 per contract as an opening transaction (sold-to-open). Although I would've liked to have gotten $.25 per contract or more for this trade, it just didn't seem like it would get there. I also opted to keep us at the $65 strike instead of moving up to the $70 strike where we could've received about $.35 per contract. I just felt that having that extra $5 of cushion (from $65 to $70) in case of a massive stock drop, was worth giving up the extra $.13 per contract. With PG stock currently at $86.50 per share, we have over a $21 cushion to our strike price, which also represents a nice buffer of 25%. As mentioned in all my advice for successful put-selling, I like to stick with strikes that are at least 20% to 30% below the current stock price. It helps keep the win rate very high. If you did not place your order yet, or have not been filled yet, continue to work your order GTC (good-til-cancelled) within the recommended sell range. Kellogg (K) We also adjusted our put-sell order on Kellogg yesterday to a new expiration month and price range. I did see some sales go across the tape at $.20 per contract yesterday, but until I hear actual confirmation from members about fill prices, I won't call this one official yet. If you have been filled, please shoot me a note and let me know. For now, the instructions still stand, and are listed below again for reference. Sell (sell-to-open) the K September 2017 $55 put options for a limit sell price in the range of $.20 - $.30 per contract, GTC, as an opening transaction (sell-to-open). As of now, I'm seeing the market for this put option is currently $.10 bid/$.20 offer, so we may have to wait for a drop in the stock to get filled. Emerson Electric Co. (EMR) We've already been filled on our EMR play at $.20 per contract, but I did hear from other patient members yesterday that they got filled at $.25 per contract. Persistence and patience can certainly pay off sometimes. Great job. Friday Q&A Q: Hi Lee, How much put-sell positions do you hold simultaneously ? ... the question arises for sizing each position in relation to the available margin. A: Good question. Unfortunately, there's no hard and fast rules on this one. We will have as many positions as the market allows us. If opportunities are there, we will take them. If none arises, we sit tight. For those of you who have been with me since the IMT days, you know our trades come in bunches, mostly after there has been a drop in the market. And when the market is flat to rising, there are less trades. I know this doesn't help you too much, but if we go with our history, I don't think we've ever had more than 10-12 positions at any one time. Now, the amount of trades that you could possibly get involved with us is also dependent on your account size. I've always stressed that you are better served by executing these trades in a margin account because you would only need about 20% of the value of the strike price to hold the trade. For instance, with our EMR $45 put-sell, you would need $4,500 of free cash in your account per each option contract sold, if we end up having to buy the stock at expiration. But until that expiration day comes, you would only need roughly $900 (20% x $45) of free cash to maintain the trade per each option contract sold. Each option contract equates to 100 shares of stock. So if you sold five (5) put options, you would need $4,500 of free cash for margin, but would need a total of $22,500 at expiration if we had to fulfill our agreement and purchase the stock. If you executed any of these trades in a straight "cash" account or IRA, you would always need to have the full 100% of the cost on hand at all times. Using margin allows you to get involved with more trades. Now, having said that, it still depends on your account size. Would you be able to get into all 12 trades if we had that many? Maybe, but you might only be able to sell just one contract of each trade. Since we don't know how many trades we'll do, do you sell five contracts of that first trade, and then four of the next, and three of the next, etc? Hard for me to tell you how to allocate your funds. But know, we do take profits roughly every 60-90 days on our trades so your cash will get freed up in that time span. Unfortunately, not everything is black and white, including our system, but I try to make it as simple as possible. Hope this answer gives you some clarity and guidance. Q: FYI, Lee, thought you might like to know that Schwab has a new feature its clients can use to buy or sell options: Walk Limit. With it, you start your offer at one price, set your limit price, set your incremental price change, and set your "walk time" - how quickly (in seconds or minutes) you want your offer to move toward your limit price. In the case of the revised Kellogg put-sell today, for instance, I set my initial offer price at $.25, my limit price at $.21, lowering my offer by $.01 every 20 seconds. A: Thank you to one of our wonderful members for bringing this fantastic feature to our attention. This is exactly the type of tool needed for our type of trading. In every put-sell alert I've given, I've always recommended starting your sell offer at the high end of the range and incrementally moving it lower over time if you aren't getting filled. That required not only manual action on your part, but also constant monitoring on your part to see what needed to be done next. This new feature by Schwab takes care of all of that. Set it and forget it! Perfect. I'm not aware of Interactive Brokers (IB) having this feature on their platform, nor of any others, although I haven't checked in awhile so maybe they do. Thank you for bringing this to our attention. If anyone else has good tips that they know of, please share with us. Q: Re:Market Makers Lee, thanks for the insight on Market makers on a subscribers question last Friday about placing a limit order to close a position once it declines to 20% of original value. This insight is helpful since I certainly have limited knowledge in this area. Maybe others? Question: I use TD Ameritrade, and here I am able to set triggers, that once the trigger is "hit", an order is then placed into the market. In my thinking this avoids tipping my hand to the market makers. Do you agree or am i missing something? A: In last week's Q&A I went on a long winded explanation about how to not let the market-makers see your order sitting there when trying to buy back the put option after it declined by 80% (my 80% Rule). This was only the case if you placed the buy-to-close order immediately after you get filled on your sell-to-open order. This method clearly lets the market see what you're trying to do. But if you wait until the option's offer price has declined 80%, then you can place your order to buy it back at that price. This way, you can get the trade done immediately and not have to use a GTC order. For your specific question, if the 80% threshold is your "hit" level, then your order will be placed at that time and you should be able to get filled immediately at the correct price. This method will work to your advantage as you will not have a GTC order sitting there for everyone to see. You are doing it right! Another great tool for options traders like us. That's all for today. Have a great weekend! Contact us here with any questions. Regards, Lee Let's Grab That Cash!