Trade Adjustment Part III - Kellogg, And Friday Q&A
Trade Adjustment Part III - Kellogg (K) Hello Smart Option Sellers! Well, it worked. Through a combination of the Kellogg stock dropping today, and us pulling most of our orders from yesterday, the bid/ask market on the June 2018 $52.50 put option went up, just as I expected it would. Once the small bit of $.25 offers were filled this morning (not sure if those were left over Smart Option Sellers who didn't pull their orders, or just other players not affiliated with us), the bid/ask market immediately went to $.30 bid/$.40 offer. At that time, I sent out the alert from earlier, and most of you were filled between $.30 - $.35 per contract. Well done! Having 26 years of experience with the mind-set of the option market-makers (I was one a long time ago), I know how they think and operate. If someone wants to show them an offer like we did ($.25 per contract) and have it sit there while the stock is falling, they will "lean" on us for as long as possible until it's just too good to pass up. What does that mean? Well, when a stock drops, the put option prices should go up, and it will be more expensive for someone to buy that option. But in the case like yesterday and the day before, we kept our $.25 offer in there even while the stock was dropping. That put option should've been trading for at least $.30 or $.35 per contract during those two days. When an option market-maker buys a put option from us, they need to offset their risk (buying options from us is a risk to them), by simultaneously buying shares of the stock. So they will only buy the put option from us once the stock reaches a certain level. In our case, that stock price level was around $66.50 in my opinion. Once the market-maker saw that our $.25 offer price was still sitting there while the stock was dropping, he figured he might as well see how low Kellogg stock can fall before buying our put option at $.25 per contract. For him, the cheaper he can buy Kellogg stock, the better. So he will continue to use, or "lean", on our option orders to gauge when he should pull the trigger. Our orders were triggered today when Kellogg stock hit around $65 per share. The market-maker was trying to save himself about $1.50 in the stock price by trading with us when the stock price was $65 instead of $66.50. Since he needs to buy stock to hedge his risk, he tries to wait as long as possible while the stock is falling, as long as he knows we're still sitting there with a cheap put option offer. That is why I decided to have us pull the order because I knew they were leaning on us by using our orders as leverage for themselves. Once our orders were pulled, the real bid/ask market came to light on the $52.50 puts. Right now, that market is $.30 bid/$.35 offer, and most of our members were able to sell the put option for at those more "normal" levels. Great job everyone. And since a majority of you got the higher prices today, we'll adjust our official entry price from yesterday by a few pennies to accurately reflect the fills. Here's what we did (officially): Sold (sold-to-open) the K June 2018 $52.50 put options for an official sale price of $.28 per contract as an opening transaction (sold-to-open). I'm sure many of you might not really understand the point I'm trying to make with the market-makers leaning on our order. It's kind of technical and a concept that is confusing for some. But nonetheless, I'm here to help you get the best possible trades and I will use my knowledge and experience to do it. Great job everyone. Friday Q&A Q: "Do no enter any order unless the current option price is at, or higher, than the official recommendation." Does the above statement mean that I shouldn't put an order unless the current stock price is above the strike price? A: This question is in regards to my statement that you'll find listed above the current portfolio in every alert I send out. What the statement means is that you should only place a put-sell order if: 1. You don't have a position yet. 2. You must place the sell order using an option price that is at least the same as our original recommended price, or higher. For instance, if we sold a put option for $.25 per contract, and you're a new member and wanting to get involved, then you need to place your put-sell order at a sale price of at least $.25 per contract or higher. It has nothing to do with where the stock currently trades. It is only applicable to the option price. Now, if you find that the put option price is currently trading higher than the price we got, then by all means sell it at that higher price, unless I have specific instructions not to enter the trade anymore. Make sense? Q: Hi Lee If I place an order of Kellogg as you indicated. it says K 01/19/2018 52.5P Bid 0.0 Ask 0.05 If I want to trade it, isn't the contract 0.025?? that means Per contract is 100 shares Am I correct??? I also check those HACK and BIG, bid and ask prices are exactly same. A: Hi, double check your expiration date for your question. You have the January 19, 2018 prices listed. That expires next week and wouldn't have any value, as you see in its bid/ask market. The order for the Kellogg trade is to use the June 15, 2018 expiration month. Make sure you use the new instructions I discussed earlier today. Yes, each individual option contract is equivalent to 100 shares and the HACK & BIG trades are still open and you should have your GTC orders working. Q: Lee, I got filled this time. Question though.. just curious to know what happens if I get assigned these 1000 shares (10 contracts) and I don't have the $52500 to buy them? A: Always a good question, and once again, a topic we should discuss. As many of you know, in order to sell put options, you will most likely be doing it in a margin account. With a margin account, you will not be required to have the full $52,500 (in your case) in your account at the outset of the trade. Most likely, you'll need about 20% of that figure on hand ($10,400). This is the minimum you'll need to have, but it doesn't get you off the hook as far as having to buy the stock if we get assigned. In that case, yes, you'll need to come up with the full $52,500. In the meantime, the margin requirement is a fluctuating amount, and moves up and down as the stock price moves. If the stock keeps dropping, and it looks more like we may have to buy the stock, the margin requirement will keep going up. If you don't have extra funds in your account to cover the new larger margin requirement, you will get a "margin call" from your broker, which means you'll need to deposit more funds or liquidate other positions that you're currently holding. Depending on your broker, there will be a time lag in which to act before they automatically start liquidating positions. It's best to contact your broker and find out their policies so there's no surprises. Now, it is usually my goal to keep us from having to buy the stock, only because most of our members would rather have it that way. Since running this newsletter (and Instant Money Trader from 2008-2016), it is the desire of most of the members to just keep collecting the upfront cash and forego buying the stock. In order to do that, we have taken defensive action multiple times over the years to adjust the put-sell trades so we don't have to buy the stock. This consists of "rolling" the positions and it helps alleviate margin calls. Don't worry if you don't know what "rolling" means. I will explain it if/when the time is necessary. Now, I can't guarantee that we'll never buy the stock, because in the end, we may end up buying a great stock for a great price. Would that be the worst thing in the world? Of course not, because once you buy a stock, you can ride it back up for theoretically unlimited gains. That would be amazing. Currently, with put-selling, the most you can make on a trade is whatever you sell the put option for. Yes? But if we have to buy the stock, we can make so much more. Think about that. Anyway, your broker will always let you know if you're getting close to a margin deficit, and you will have to take action at that time. Also, I've just recently completed a new report for everyone on this specific margin topic. You can download the report here, or go to the site where you'll find it under the "More" tab along the top of the page. It's called the "Margin Primer". It's worth a read. And in a previous alert, I gave a link to the CBOE margin calculator. Give it a try and see how it compares to your actual margin requirement with your broker. Q: If a person has a call on a stock such as BRK-B and the call has gone up in value significantly, does it make sense to roll the call to the same month at a higher strike value? This would result in a net profit at this time and then have a call at a higher strike. Of course the call could be rolled to a later month but to keep a Delta of .90 the cost would be higher and net profit lower. The new later month call would be at a lower strike than the June call strike. A: This question is in regards to the Warren Buffett report that I have for sale on the site. The trade I outline in the Buffett report has been doing very well, and I've heard from a number of you who got into it. Congrats! As for your question, it comes down to what you should do now that you're siting on a nice profit. You should look at it as the same as you would with any other profitable trade. Do you: 1. Get out and take a profit? 2. Sell partial to take out original investment? 3. Roll the options? There's multiple choices, and it's up to you to decide individually what to do. Rolling up the strike price as you mentioned within the same month would allow you to lock in some gains now on the original trade while keeping you in the game by using the new call option. Going out to a different expiration would allow you lengthen the trade but it would cost more as you say, and the the net profit would be smaller. You're on the right track. You just need to decide what's right. In the end, you're sitting on nice profit. Where are you taking me to dinner???? Q: Hi Lee, Regarding your trade update on K today: 1) Are these trades being executed by computer or are actual market-makers (people) executing these trades? Or is a combination of computer and market-makers? 2) This is what I was asking in last Fridays' Q&A. These premiums are dropping as soon as your alert goes out even when the stock price drops, crazy! Is it possible that the market-makers are a subscriber to your service and playing with the premiums? 3) Just curious as to what trading platform you use and how you like it? A: Good questions. 1. There are always combinations of people making trades. Just think about us. We're sitting here in front of our computers trading online, so we are among the public investors trading alongside of, and against, the floor traders (market-makers). 2. I have no idea if any market-makers are reading my newsletter (I don't ask for occupation when you sign up), but I highly doubt it. The situation we've seen with the option prices falling soon after I issue an alert, or not budging, is a combination of many of us hitting the same trade at the same time, and the market-makers leaning on our orders as I explained above. But once again, we are a very small group and our trades should not affect the overall market for very long. I believe it's more of a function of the market-makers playing games and the stock moving higher on us quickly after I send out the alert. With Kellogg, we were fortunate enough for the stock to keep dropping. Now that all of you have been able to sell the put options, now we need the stock to go back up! 3. Personally, I use Interactive Brokers (IB), but I also use Schwab. I know that Think or Swim (TOS) is a great platform too, but I don't use it. Well, that's all for today. Have a great weekend! Continue to 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!
