Profit Results And Friday Q&A
Hello Smart Option Sellers! Happy Friday. We made it through another week. And it was a good week here at The Smart Option Seller. We've seen a number of profit-taking opportunities of late and we've just been filled on two more yesterday. Let's go over the results. Intel Corp (INTC) We were able to easily get filled on the INTC buy-back trade at $.04 per contract, a penny better than my recommended price of $.05 per. Here's what we did: Bought back (bought-to-close) all of the INTC October 2017 $28 put options for an official buy price of $.04 per contract as a closing transaction (bought-to-close). We originally established (sold-to-open) this put option on June 28, 2017 for a sale price of $.25 per contract, and now we took gains by buying it back (bought-to-close) for $.04 per contract. With the fill at $.04, it locked in a gain of $.21 per contract ($21 for every contract traded) and a return on margin (ROM) of roughly 3.75% in about five week's time. If you like to annualize, that's roughly a 38% return. Here's how the margin calculations break down: 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 $2,800 = $560. Your margin requirement at your broker may be slightly higher or lower. Ask them. So our margin requirement is $560 per each put option contract sold. Our profit on this trade is $21 for every contract sold. The return on margin (ROM) comes out to $21/$560 = 3.75%. The fill at $.04 also allowed us to capture 84% of the full profit potential ($.21 gain/$.25 full potential = 84%). We like to close trades early before expiration when we can capture at least 80% of the full profit potential (my "80% Rule"). This is just smart money management and it allows us to lock in gains and free up cash to be put towards new trades. If you have not been filled on this trade yet, just keep your order working "GTC" at $.05 per contract or cheaper. This was one of our more ideal trades as far as timing goes. If we identify a temporary bottom for a stock, sell the put option at that time, and then have the stock rebound fairly quickly, we can take our profits that much quicker. That's what we did with this INTC trade. We hit a near-term bottom on June 28, sold the put options, and then the stock rebounded not long after that. The put option prices decayed very quickly from that point which led us our profit-taking trade yesterday. Perfection! Congrats everyone. Kellogg (K) As mentioned in yesterday's alert, I was a bit surprised that we hadn't been filled yet on the K buy-back order, considering K came out with good earnings which popped the stock $3 per share. In cases like that, traders are scrambling to hit any decent bids that come in the market. Well, our decent bid had been sitting there for awhile, and they still wouldn't sell to us. The option market-makers finally came to their senses and filled us at our $.05 per contract buy prices. Filled! Done! Profits locked in! Here's what we did: Bought back (bought-to-close) all of the K September 2017 $55 put options for an official buy price of $.05 per contract as a closing transaction (bought-to-close). We originally established (sold-to-open) this put option on May 5, 2017 for a sale price of $.20 per contract, and now we took gains by buying it back (bought-to-close) for $.05 per contract. With the fill at $.05, it locked in a gain of $.15 per contract ($15 for every contract traded) and a return on margin (ROM) of roughly 1.37% in three month's time. If you like to annualize, that's roughly a 5.48 return. Although this was one of our smaller trades as far as dollar and return rates are concerned, it still shows the power of how option selling is a very high-win probability type of strategy. Lots of safe & secure singles. Here's how the margin calculations break down: 20% x $5,500 = $1,100. So our margin requirement is $1,100 per each put option contract sold. Our profit on this trade is $15 for every contract sold. The return on margin (ROM) comes out to $15/$1,100 = 1.37%. The fill at $.05 also allowed us to capture 75% of the full profit potential ($.75 gain/$.20 full potential = 75%). Congrats again everyone. If you need to see how we've done so far this year, just go to the track record. Friday Q&A Q: Is there any way to tell whether an option will trade in pennies, or not?? A: Great question. And we've had this one before. The option exchanges had decided about 10 years ago to allow certain stocks to trade their options in penny increments while the others stayed at the former $.05 increments. I can't tell you the rhyme or reason for which stocks were allowed to trade in pennies. It was probably due to the popularity of the stocks and the current liquidity of their options. Here's a good link to read an article about the decision process and within that article is another link to download an Excel spreadsheet listing all stocks and which has penny options available. Now, there's also another way to trade options in penny increments if your broker participates in the "Price Improvement Auction". I know Interactive Brokers (IB) (stock & option broker) uses the auction system for their orders, and maybe your broker does too. Ask them! Q: I would love to have some more etf's in my sell put's portfolio. Etf's are somewhat less volatile then individual stocks, and are not heavy influenced by earnings. Do you know of etf's that have options with a reasonable volume/open interest ? A: There are so many ETFs listed today. Thousands of them. I like your idea on selling puts though because ETFs are less prone to large gaps and swings. The only downside to that is volatility is typically low with ETFs, so you won't be able to sell put options very far out-of-the-money like we do with individual stocks. But that may be ok for you, though. Stick to the major ETFs - SPY, QQQ, IWM, XLF, GLD,etc (these are not recommendations!). Here's a link to all the ETFs available. I've given the page that has options trading only. If you want to expand the list to every single ETF, just go to the homepage of that website and start the search over. Hope this helps. Q: Recently I've done the following trades at suggested price: Buy to close - WMT, HACK, AA & EMR Sell to open - GSK & HACK Since Instant Money, I've read questions about the recommended contracts to open, I'm trying to define that issue for my self, analyzing my margin, time, risk tolerance, so on. Can you please share some thoughts about it? A: This is such a subjective question that it's almost too hard to answer. Each trader has their own financial situation and risk tolerance. My advice is to always start with trading one option contract until you completely understand a put-sell from start to finish. This way, you can see how the margin works and see how much of your funds a put-sell will require while it is open. My goal is to keep our strike prices at $50 and under. If you use the typical 20% margin, selling one put option contract on a $50 stock would have a $1,000 margin requirement. Selling five (5) contracts would need a $5,000 margin requirement. Now, we typically can have up to 10 open positions at a time. Should you trade 10 contracts of just one stock, or should you trade one contract of each of those ten stocks? That's up to you. Now, in the very rare event that we may be assigned the shares at expiration, you're going to need to pay for the stock in full at that time. Do you have enough funds to allow that while not disturbing your other open positions? Although it would be very rare for us to be assigned, it still is an outside possibility. You would need to have some extra cash to cover that purchase. Do you? My best answer is that you will be able to tell over time what your scenario can call for. You will begin to understand how your cash reserves are deployed for put-sells and you'll see how cash balance reacts. It takes time to gauge it. Start small and work up from there. That's all for today.. Continue to work all other trades as instructed and continue to hold all other open positions as-is. See the Current Portfolio below for current prices & instructions. Quick note on the Current Portfolio - if you are a new subscriber and don't have a position yet on any of our trades, make sure you enter your order at the original recommended sell prices. Do not enter any order at current prices unless it's higher than the official recommendation. If you are unsure or have any questions, please ask us! You can always contact us here Regards, Lee Let's Grab That Cash!