Trade Update And Monday Q&A
Hello Smart Option Sellers! Target Corp. (TGT) We were able to get filled on the TGT buy-back order that was initiated on Friday. Fills came across between $.18 to $.20 per contract so we'll place the official mark at $.19 per. Here's what we did: Bought back (bought-to-close) all of the TGT July 2017 $45 put options for an official buy price of $.19 per contract as a closing transaction (bought-to-close). We originally established (sold-to-open) this put option on January 24th for a sale price of $.30 per contract, and now we took gains by buying it back (bought-to-close) for $.19 per contract. With the fill at $.19, it locked in a gain of $.11 per contract ($11 for every contract traded) and a return on margin (ROM) of 1.2% in three and a half month's time. For those of you who need a refresher on margin - here's the deal: Whenever we sell an option contract, your broker requires you to maintain a "margin requirement". The margin requirement is just part of your account funds that need to be held aside while the trade is active. You are not borrowing money from anyone nor are you paying margin interest to anyone. The margin requirement is typically 20% of what it would cost to buy 100 shares of the stock at the strike price. In this case: 20% x $4,500 = $900. So our margin requirement is $900 per each put option contract sold. Our profit on this trade is $11 for every contract sold. The return on margin (ROM) comes out to $11/$900 = 1.2%. Although we typically like to close trades early when we can capture at least 80% of the full profit (my "80% Rule"), this time I opted to take smaller gains in the name of safety as TGT is releasing earnings on Wednesday before the bell. As I mentioned on Friday, many brick & mortar retailers are getting decimated by Amazon's online model, and I didn't want us to be exposed to a possible rout in TGT as well. Stores like Macys (M), Nordstom (JWN), Kohl's (KSS), & Dillards (DDS) all got creamed last week, more than I thought would be seen. It's unfortunate we didn't buy put options on those. Many of these stores are your typical "anchor" outlets in major malls and will probably be seen less and less of over the next few years. I'm not sure I'd put Target in the same category as these stores, but it could be vulnerable to a drop in the stock price on Wednesday when earnings come out. Should we play that possible down-move again by buying put options? We did it profitably last quarter. I'll take a look at the options and will let everyone know by tomorrow morning. If you did not buy back your TGT put-sell position yet, you can still do so at the recommended levels from Friday's alert. Or, you can continue to hold if you feel that's what's right for your game plan. Officially, we're out. Monday Q&A Q: Hi, Lee. I thought I would chime in on your answer to the first question. I have been with you for a long time, and I have consistently sold 10 contracts on each option. My investment account with TD Ameritrade has varied and I only keep a very small amount of cash in it. TD Ameritrade does not require me to have cash to back up my option positions. If I were forced to make a buy on one of my positions, I would have to sell some stock to cover it. However, with your policy of getting out at 80%, I don't worry about being forced to buy. Do you see any problem with this? A: Hi, although we try not to get assigned on the put options (having to buy the shares at expiration), there still is the possibility that some day we may take ownership of the stock (not a bad thing). But, if we do end up buying the stock, we need to pay for it somehow at that point in time. Is it worth you selling shares of other stock that you might not be ready to give up yet? It might be smart to hold some cash in the account, especially if it looks like we may get assigned at expiration. You would know this would be a good possibility if the stock price is trading below the strike price near the time of expiration. You could decide at that time if it would be okay to sell other stock to cover the impending new purchase, or transfer cash in from another source. Entirely up to you. Thank you for the question. Remember, send me your questions, as I'll put them in here if appropriate. That's all for now. Continue to hold all other trades as-is and I'll be back tomorrow on possible unofficial earnings plays. Contact us here with any questions. Regards, Lee Let's Grab That Cash!