Kroger Update And Friday Q&A
Kroger Update (KR)
Hello Smart Option Sellers! In yesterday's alert, I gave an unofficial recommendation to potentially take advantage of Kroger's earnings announcement that came out this morning. The numbers were mostly inline with expectations, but not enough to cause the stock to make the big move needed in either direction (as of now). The stock is currently down about $1.50 per share. It needs at least a $3 move in either direction to help the cause. As of now, the stock is priced at $21.30 per share. If it's going to continue to fall, it needs to go below $20 to give any kind of profit from the put option side of the trade. Remember, if you entered this trade yesterday, you bought both a call option and a put option. Only one side could profit if the stock moved far enough. But if it didn't, then both the calls and puts would lose value. That's what's happening now. If you got involved with this trade, your best course of action is to hold until later in the afternoon. Maybe the stock will keep dropping. As of now, both the calls and puts don't have any value left. You might be able to sell the put option for nickel, if you're lucky. Hold until later in the day to see what happens. If any life comes back to either option, my advice is to sell it for what you can and recoup a few bucks if you can. Otherwise, the options will just expire worthless and disappear from your account. Just make sure that if either option happens to go in-the-money by the end of the day, make sure you sell it to close out the position. Playing the earnings game is a tough nut to crack. This is why it's imperative that you only buy very cheap options and only play with "fun" money. It's a losing game over the lng run but it's great when you can hit a big one now and again. This is the exact reason why we sell put options - because the win rate is so high, typically greater than 90%. Small, consistent gains is the name of the game. That's what we do. So we'll stick with it. Friday Q&A Q: What is the advantage of buying a Strangle over buying a put and a call separately? A: This is in direct response to the Kroger play from yesterday. When buying or selling options of different strike prices and/or different expiration dates, you can either buy/sell them separately as individual transactions, or you can buy/sell them both as a single spread transaction. To me, it's easier and more efficient to buy/sell the options together as a spread. Here's why: 1. As easy as it is to buy each option separately, you do expose yourself to "slippage" risk. That means while you're spending the time to execute one of the options in your trade, the market can move adversely against you in that short period of time, leaving the other half of your trade exposed while it waits to be transacted by you. Yes, even in that short 30-60 seconds it takes to trade one side, it's still long enough to affect the other side. With the KR trade, let's say you wanted to buy the call and the put option for $.20 each, spending a total of $.40 for the whole trade. At the time you get to your trading platform, it looks as though each is offered at $.20 and it seems buying each at $.20 would be no problem. But as you're getting ready to buy the call option first for $.20, KR stock starts to drop in price very quickly. Now, the call option has moved down to $.15 while you just bought it at $.20 per contract. You just gave up the opportunity to buy it for $.05 cheaper. And now with the stock dropping, the put option has moved up to $.30 per contract. This is $.10 more than what you were hoping to buy it for If you buy the put option for $.30, you've now just spent $.50 for both options instead of $.40. I know that doesn't seem like much, but that's the risk you take when buying each option separately. Think about how bad you'd feel if you were playing with very expensive options and lots of contracts. 2. Now, instead of buying each separately, you can enter into a "strangle" spread which allows you to buy both options at the same time, keeping you away from adverse, quick market moves. A strangle consists of either buying or selling two options at the same time, either within the same expiration date or different expiration dates. With KR, you could've entered a strangle to buy both the call and the put together for $.40 total. If the market moves, each option will change in price of course, but your order stays the same. The call and put could be worth $.20 each, or $.15 for one and $.25 for the other. Doesn't matter. The strangle will only be executed if you can buy both options together for $.40 total. This keeps you from slippage exposure. Anyone who has an option trading account should automatically be approved to trade spreads like this. Ask your broker if you are unsure. It's the smarter way to trade these earnings plays. That's all for today. Wishing safety this weekend to any of our members who may be affected by Hurricane Irma in the next few days, and that the damage will be minimal. It's scary. I've lived through a number of hurricanes while living in Florida. Too bad we have Hurricane Jose right behind Irma. Septembers are tough, not just for the markets. You can always reach us here 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 unless the current price is at, or higher, than the official recommendation. If you are unsure or have any questions, please ask us! Warren Buffett Report I continue to get good feedback on this new report, so I'll keep this notice going for the time being so everyone has a chance to see it. If you need the link again, click here to read about it. Regards, Lee Let's Grab That Cash!