Market Update And Friday Q&A
Hello Smart Option Sellers! Happy Friday everyone! Good to get this week over. Seemed to drag on, didn't it? No new trades for today so let's go over what's happening in the market and assess our current positions. That little breakdown we had in the tech market two weeks ago is a distant memory. Most of the big name stocks that fell in price are well on their way to recovery. The Nasdaq composite is moving back towards all-time highs and the Dow Industrials and the S&P 500 both hit another all-time high earlier in the week. There's nothing stopping us! Volatility, as measured by the VIX, is still scraping along all-time lows. This means two things: 1. There is complacency in the market as everyone is feeling good about their portfolios while stocks keep marching higher. 2. Option prices are cheap. This is good for option buyers and not so good for option sellers (like us). The silver lining for us though is that each stock and its corresponding options have their own internal volatility levels which is different than the VIX. The VIX measures the "mood" of the market in general as seen by the movement in the S&P 500. Since each stock has its own volatility component, we can still find good put-sell trades once a stock reacts to news of its own - like an earnings miss, an FDA decision gone wrong, or executives cooking the books. This leads to sell-offs in that specific stock which will pop the volatility and thus pop the option prices. That's good for option sellers like us. All the while not really having much affect on the broader market and its own volatility levels as measured by the VIX. So when people talk about volatility, you need to understand the difference between the general market and stock-specific levels. Anyway, I'm confident that we will continue to find quality put-sell trades as there are always great stocks that have a price drop that's not so much warranted (like our recent WMT trade for example), which allows us to hop into new trades. Plus, earnings season is always around the corner, and that's when we hit our stride. Sometimes the put-selling game just requires patience from time to time. We need to let the trades develop and then we can take profits. Portfolio Check We currently have ten open put-sell positions in our portfolio. Our Verizon (VZ) play is still viable for anyone who hasn't taken a stake yet, and the Alcoa (AA) play keeps moving in and out of viability. If you are a newer member, you should have been able to get into both of those trades this week (if you wanted to). Our Wal-Mart (WMT) play happened very quickly and I'm going to leave the current trade instructions in place. We had more Smart Option Seller members email me their fill prices on this trade and many did better than I thought. The average sell price was about $.37 - $.38 per contract. I marked our official sell price at $.30 per since I didn't think many members had gotten fills. For those of you who did get filled, it was a great entry price. That put option is now valued near $.20 per contract. If you didn't get filled, keep your order working "GTC". It will take another drop in the stock price to pop the put option price back up. That may or may not happen in the foreseeable future. Continue to hold all other trades as-is. Except for the Verizon play which is right near our entry price, all other positions are well in the black. Friday Q&A Q: Mr. Lowell, About WMT alert, I was thinking if this downside could be an opportunity for a long term buy, may be could be a good moment to use your long term strategy. I'm not sure if you could answer or gave Us more information about it. But if it's possible, I appreciate it your comments. A: Thanks for writing in. I believe you may be referring to the deep-in-the-money (DITM) call option buying strategy I discuss in my book. This is the only option-buying strategy I recommend and can be used in place of a long stock strategy. As far as WMT, if you wanted to get long the stock as you believe it may go higher, you could purchase a DITM call option with a Delta of at least 90-95%. I know this may sound foreign to many of you, but using this strategy can not only cut your cash outlay by as much as 50%, but it also limits your downside risk by the same amount. If you wanted to buy 100 shares of WMT today, it would cost you roughly $7,490. But buying a DITM WMT January 2018 $37.50 call option (example only!) would cost you roughly $3,825. That option purchase would get you practically point for point movement with the stock, Meaning, if WMT stock rallied by $1 per share, the option price would pop close to $1 per contract as well. The benefits here are that you're saving $3,665 to buy the option versus buying the stock. That's a 48.9% discount. Plus, your maximum downside in the trade is cut by the same amount. You could only lose $3,825 on the option purchase whereas the stock could hand you a loss of $7,490 in the worst-case scenario. Buying a DITM call option is a superior method in my opinion. A few things to consider though: 1. With the option purchase, you won't receive dividends or voting rights. Only shareholders get those. 2. Options expire. So if you want to hold the trade indefinitely, you'll need "roll" the options at expiration to a new DITM trade. 3. You need to be bullish on the stock. This is the most important item. If you're not bullish, there's no sense in using the strategy. If you have my book, read Chapter 6. It explains it all. Hope this answers your question. That's all for today. Keep sending those questions if you have them. You can contact us here Have a great weekend! Regards, Lee Let's Grab That Cash!