Market Update And Friday Q&A
Hello Smart Option Sellers! The market had a pretty good pullback this week which sent volatility on a swift move up. When stocks fall, volatility goes up. See the chart of the VIX, which represents volatility levels for the market in general. The VIX gets its value based on options trading for the S&P 500 index. When the VIX rises, it's a very good indicator that there's some fear in the markets due to a sell-off of stocks. The rise in volatility makes options contracts more expensive, which is a great thing for option sellers like us. Let's see if there's any follow-through to the downside next week (although the market is up today). I'd rather not jump on any new put-sell trades yet in case the market keeps falling. For any newer Smart Option Seller members, check the current portfolio and instructions (listed below) as you can still get into two of our positions if you'd like. Friday Q&A Q: In today's Friday Q&A you said, "Although it would be very rare for us to be assigned, it still is an outside possibility." Please describe exactly how this might happen. The implication of your statement is that assignment could happen under some un-anticipated circumstances. Are you suggesting a circumstance where assignment results in less financial damage than buying back the option before expiration? Please describe and explain those circumstances. A: This question came in response to last Friday's Q&A in which a member asked about position-sizing, risk tolerance, and managing the margin requirement for put-sell positions. I did mention that in very rare cases, we could be assigned the shares at expiration. This new question poses the issue of what would lead to that assignment. At the Smart Option Seller, it is our goal to increase the size our our accounts through the continuous collection of income through put-option selling. In the rare instance that we may get assigned, we would be buying a quality stock at a very good price. This would lead us to be able to participate in potentially unlimited upside profits. That's a good thing. But being assigned is secondary to our goals, as most members are truly interested in just collecting the upfront cash and not having to buy the stock. So what would be the situation in which we would get assigned? I can see a few instances where this would happen: 1. We have a complete and utter meltdown in the stock market that is so swift in nature that the put option buyers would want to exercise their put options and force us to buy the stock. In this case, the stock moves would be too fast for us to take any other action. I don't see this as a feasible possibility though, as most put option buyers can hold their positions through any market downturn. The put option will keep increasing in value as the stock keeps falling. They will be making money whether they exercise the put option or not, so it's not a necessity for them to exercise their positions and force us to buy the stock at that moment in time. Hence, we can keep holding the put-sell to see if the stock moves back up and takes us out of jeopardy. 2. The stock keeps dropping on us, we "roll" the put-sell position to a new, more conservative put-sell position, but yet the stock keeps dropping even more. If we cannot "roll" the trade anymore, we would be forced to buy the stock at that time. But this would be such an incredible buy-point, that I don't think anyone would be upset. 3. If I decide to not take any defensive action and let us get assigned on the position. Remember, we've sold the put option at a strike price level that we deem to be a good long-term buy price on the stock. In the eight years of running my previous put-selling service (Instant Money Trader), we never had to take control of any shares of stock. We did a few "rolls" that turned out to be a positive result, and a few rolls that gave us a small loss. And maybe one or two stocks in total, where the stock fell below our stop-loss point, that required us to just buy the put option back for a straight up loss on the trade. All of our current trades have an ultimate stop-loss level that is set 25%-35% below our strike price. If the stock breaches those levels, we would most likely get out of the trade completely at that time. Yes, you can always buy the option back before expiration, but there's no way to tell if that would be a better outcome financially. Let's say we did get assigned on a stock that ultimately turned around and moved back up, putting us in a profitable position. This would be a better outcome than buying the put option back at a loss. We have to go with the long-term history of the stock market knowing that it eventually keeps going up over time. Having long stock shares will benefit from that, even if we have a short-term temporary loss if we had to buy the stocks during the down-move. Hope this helps. Q: I have a suggestion for you to consider. Could you download and keep the list of companies that can trade in pennies handy in you files? Then, if you recommend a trade in any of them, you would merely have to add one sentence, such as: Note: This option can be traded in penny increments. I think this would add a nice tiny bit to your already very efficient service. A: Thanks for the suggestion. We talked last week in the Q&A about stock options that trade in penny increments versus the typical $.05 increments. In last week's Q&A, I posted a link to a website that explained the penny process which also included an Excel spreadsheet listing every stock that has penny increments. You can go to the Helpful Links on our website to be directed to this other external website. You can then download the Excel spreadsheet for yourself. Warren Buffett Report I'll keep this notice going in the next few alerts just so everyone has a chance to see it and remember it. If you need the link again, click here to read about it. 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 Have a great weekend. Regards, Lee Let's Grab That Cash!