Wrapping Up 2017 - It's Been A Great Year!
Hello Smart Option Sellers! Lots to discuss today, so read on for this last alert of 2017. Trade Results - Gap Inc. (GPS) A great way to finish off this year - with another win. We had no problem getting filled on the GPS buy-back order yesterday at our price of $.06 per contract. Some of you were even able to get it for $.05 per contract. Well done! Here's what we did: Bought back (bought-to-close) all of the GPS March 2018 $18 put options for an official buy price of $.06 per contract as a closing transaction (bought-to-close). If you did not place your order yesterday, you should have no problem getting filled if you still wish to do so. Here are the profit details: We originally established (sold-to-open) this put option on October 20, 2017 for a sale price of $.25 per contract, and now we took gains by buying it back (bought-to-close) for $.06 per contract. With the fill at $.06, it locked in a gain of $.19 per contract ($19 for every contract traded) and a return on margin (ROM) of roughly 5.3% in just over two month's time. If you like to annualize, that's roughly a 27.5% return. To understand how the margin works and the calculations involved, here's the breakdown: Whenever we sell an option contract, your broker will require you to maintain a "margin requirement". The margin requirement is made up of funds that are already in your account and will need to be held aside while the trade is active. You are not borrowing money from anyone nor are you paying interest to anyone. Some people can confuse the margin requirement with "trading on margin". They are completely different things. We are not trading on margin when selling put options. 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 $1,800 = $360. Your specific margin requirement at your broker may be higher or lower than that. If you are unsure, just ask them. So for this trade, our margin requirement is $360 per each put option contract sold. Our profit on this trade turned out to be $19 per each put option contract sold. Hence, the return on margin (ROM) comes out to $19/$360 = 5.3%. Also, the fill at $.06 allowed us to capture 76% of the full profit potential ($.19 gain/$.25 full potential = 76%). When selling options (puts or calls), your full profit potential is capped at what you initially sell the option for. In this case, that amount was $.25 per contract. We like to close trades early (buy-to-close) before expiration when we can capture at least 80% of the full profit potential. This is called my "80% Rule". In this case, we locked up 76%, which is just a tad under my threshold. And that's ok. Locking in early wins is just smart money management and it allows us to free up cash to put towards new trades. Congratulations to everyone who was involved with this win. It marked the 27th win out of 27 trades - a 100% win rate for 2017! What a great way to end the year. Friday Q&A Q: I believe you have covered this before, but I must have missed it. What is the safe (Delta) number that we as put sellers should look for? Is there a suggested range? The same question applies to volatility. Thanks. A: Hi, Thanks for writing in. As far as delta - there really is no set level in which to look for when selling put options. And quite frankly, delta doesn't play much of a role for me when choosing which put options to sell. It mostly comes down to - what price level of the stock would I be comfortable buying it if I was assigned at expiration. If the stock is at $60, would I want to buy it at $55? At $50? At $45? Only you can decide. Once you've decided on a level, you could then see what the delta is (just to satisfy your own curiosity). As far as volatility - the higher the better! Higher volatility = higher option prices to sell. Once again, there is no set level. You can compare the current volatility to its past volatility to see how it matches up. If you happen to sell the put options on the stock at a period of high volatility, bonus for you! If you sell it during a period of lower volatility, well then your payout will just be a bit smaller. Not much you can do about it. In the end, it really comes down to picking the stock you like and selling the corresponding put option that matches your desired buy level on the stock. Q: Your 80% buyback rule of PUT sells makes a ton of sense. Do you have a similar concept of when you buy CALLS? For example on your unofficial CALL buy of BRKB, how do you determine when to sell the CALL? A: Hi, great question. On the put-selling side, the answer is very easy - we buy back when we've captured 80% of the profit potential. On the other side, trying to determine when to take profits on an option buy (calls or puts) - is a bit harder to pin down. This is because everyone might have a different profit threshold. Do you take profits at 25%? 50%? 100%? Do you take profits when the option price has reached a certain level? Or when the underlying stock has reached a certain level? Lots of scenarios to consider. So what's the best answer? In my personal opinion, it's always good to take some money off the table when you can. This is typically when you have at least covered your investment in the trade. If the option doubles in price (100%), you should think about banking your original stake and letting the rest ride. This way, anything you make now is pure gravy. Also, you can try to pinpoint an area which you think the stock might stall out at and take profits at that point. This will mostly rely on your chart-reading abilities. You can also use a trailing stop-loss to help with your exit point. As the stock moves higher, you can set a stop-loss at say 25% below the current stock price. If it breaches that level, then you can look to sell the option. These are just some of the tried-and-true ways to help you keep your profits intact. Please share with us if you have any other tips that have worked. I will be more than glad to post them in a future alert. Keep sending me your questions. You know I'll always answer! And by the way, the BRK-B call option that this question is in reference to, is in regards to my Warren Buffett report that I have for sale on our website. Scroll down to the section below to read more about it. Portfolio Review We currently have five open positions at the moment (GSK, MRK, AA, OSTK, & FIVE), all of which are now either in the black or right at break-even. This bodes well for us as I foresee all of them ending up as winners. Just a little more time before we take our profits. The two of our most recent put-sells - OSTK & FIVE were trades that moved away from us very quickly and only a small handful of Smart Option Sellers were able to get onboard. I know this was unfortunate for some of you, but the silver lining is that the trades moved in our favor very quickly. That's something that every trader wants to see. In order for that to happen, the stock must move higher quickly (higher stocks = put option values move lower). If we can key in on stocks that are about to blast higher, we can all profit quicker on the put-sell trades. My goal has always been to pinpoint those stocks which I think are about to move higher and have us sell put options on it to take advantage of an impending move. I'm glad that I've been able to offer that scenario to you all, but I do understand your frustration when the trade moves away quickly without everyone being able to get in. The good news? There's always another trade around the corner. As far as OSTK & FIVE - let's see if next week brings us a little pull-back in these two stocks which could potentially pop the put option prices a bit. This could allow others to get into the trades. If not, and I mentioned this before, maybe I'll tweak the strike prices we used in the original trade and issue an updated trade alert. Keep an eye out for that next week. So, continue to work your unfilled trades as-is, and look for any new trade updates in the near future. Thank You & 2018 Goals I just want to wrap up this last alert of 2017 and say thank you to all who joined during the year. Starting The Smart Option Seller was a big deal for me and I'm incredibly happy with how this first year has turned out. It was a great year for us and I hope many of you came away as smarter option traders and really understood why I'm so passionate about selling put options as a form of making money. I want to thank you for entrusting me and allowing me to take up a little of your time each week to help you achieve some of your financial goals. I'm proud of what we've accomplished, especially our track record of 100% wins. It was a strong year all around for the stock markets and I'm looking forward to more of the same in 2018. I hope all of you will stick around for the fun ride. I appreciate all the questions, comments, feedback and praise you have sent my way this year. It has helped fuel me to create a better product for everyone - thank you! Here's wishing everyone a happy, healthy and prosperous 2018! We'll be back next week ready to hit the ground running. You can always contact me 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!