Market Update And Friday Q&A
Market Update Hello Smart Option Sellers! Quick update on our ORCL buy-back trade from Wednesday: Oracle released earnings after the bell yesterday, and although sales and revenues beat estimates, the reason why the stock is trading $2 lower today is due to the decreased numbers regarding their cloud business. I don't agree with the stock drop today, and quite frankly, I see it as a solid buy level at this area of just under $48 per share. This is the reason why we sold put options on ORCL in the first place - because I believe the stock has upside potential. When stocks rise, put option prices go down (that helps our position). Anyway, for those of you who did not get filled on the buy-back order the other day at $.07 per contract - just keep working your order "GTC". Even with the stock lower today, the put option still has a $.07 bid (that's us)/$.08 offer. The put options didn't jump in price with the lower stock move only because they got bid up previously due to the unknown outcome of the earnings results. Once the results were released, the uncertainly got sucked out of the option price. If you follow option pricing closely, what you'll find is that in the days leading up to an earnings announcement, all option contracts will start creeping up in price as no one knows which way the stock will move after the earnings. This uncertainty is like an air pump, and it inflates all option prices regardless of which way the stock is moving before the earnings. And once the earnings come out, all that extra air is let out, bringing the option contracts back to normal prices. You would think that a $2 move lower in the stock would pop up the put option values. Normally it would, outside of an earnings event. But with the air being taken out, this is the reason why our ORCL put option hasn't moved at all in price today. If it wasn't for our $.07 bid, I believe it would only have a $.05 bid there. We're most likely the ones holding up the market on it. As I said yesterday, it will only be a matter of time until the rest of you are filled at $.07 per contract. Friday Q&A Q: Lee, thank you for the link for the calculator. I've tried using it however I'm not sure how to plug in the data. A: The calculator referred to in this question is the probability calculator I use when trying to gauge the probability of a stock reaching a certain level by a certain date. It's a great tool and I highly advise using it. You can find it here on our site. Let me go over the details on how to use it.
The upper portion of the calculator is for the inputs, and the lower portion is the outputs. Every input is self explanatory except the "Future Volatility" component. You can even leave out the dividend yield and interest rate boxes, as those inputs have such a small effect on an option's price. To find the future volatility input, you need to go to a site like ivolatility.com and use their free volatility data on whatever stock you choose. Once you're at ivolatility, choose their "basic options" feature and you can then see volatility data for any stock you choose. I've chosen to get volatility data on Walt Disney (DIS) and the volatility chart is below:
Don't confuse this with a stock price chart. This is a chart of Disney's historical and implied volatility over the last year. The blue line represents the 30-day historical volatility (HV) of DIS and shows how erratic it's been over the last year. This is based on actual movement in DIS. The orange (or green?) line represents DIS' implied volatility (IV), which tells us how erratic the option's market is forecasting DIS stock to be moving forward. Sometimes the lines move in tandem and sometimes they stray wildly from each other. When using the probability calculator, it's best to use the IV number averaged out over the past year. In this case, it looks like DIS had an average IV level of somewhere between 15% - 20%. Always use the high end in the calculator as that helps you prepare for a worst-case scenario. Hence, I used 20% in the input section. In our example above, it looks like my fictional $50 stock only has a 2.58% chance (bottom-left box) of falling below $40 by the end of the 120-day expiration period I chose. This would be an ideal put-sell trade for us if we were taking it. Hope that helps! Q: Lee, I have two Questions for you today: 1st- If a put trade is going against you, if I understand correctly, one strategy would be (if you believe in the stock long-term) would be to roll the stock further out in time. Is this a valid strategy, does this strategy work? 2- Does a vertical put spread have to be initiated at the same exact time?. What I actually mean, can you sell a put this week and than buy a put 2 weeks from now to mitigate or reduced the risk of a potential move downward and reduce your loss? A: Hi, thanks for the questions. For your first question - yes, you can roll the option trade to a further expiration date, and yes, the strategy works. We have done this many times in my previous newsletter (Instant Money Trader). If you sell a put option, and the stock falls in price very near to your strike, you can choose to buy back the current put option contract and re-sell a different put option contract at a lower strike price with a further expiration date. This is called "rolling out and down" your position. Let's say a stock is at $50 per share and you sell the July $45 put option for $.30 per contract. Now, two months later, the stock has fallen to $46 per share and the put option has moved up to $.75 per contract. You feel the stock might keep trading lower. How can you adjust the trade? You can look to buy the $45 put option back at $.75 and lock in a $.45 per contract loss. At the same time, you can now sell a longer-term December $40 put option for $.80 per contract. What you've done here is that you've given yourself an extra $5 per share of cushion (by selling the new $40 put option), and you've collected $.80 for it, completely offsetting the $.75 loss you just took on the $45 put option. If the $40 put option expires worthless in December, you will have made $.80 per contract on it, which offsets the $.45 per contract loss on the earlier trade, giving you an overall gain of $.35 per contract between the two trades. We have done this many times and has worked perfectly. As for your second question - yes, you can create a put spread (or call spread) at any time you desire. If you think you have an idea of which way the stock might be headed, you can roll the dice and execute the first part of the spread, and if the stock moves as you intended, you can execute the second half of the spread at much better prices. Good luck! That's all for today. Have a great weekend! You can contact us here Regards,
Lee Let's Grab That Cash!
Current Portfolio 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. 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 no enter any order unless the current option price is at, or higher, than the official recommendation. If you are unsure or have any questions, please ask us!