Profits Locked In - GSK
Profit Update - Glaxosmithkline (GSK) Hello Smart Option Sellers! Although the markets are closed today, there's still trading action to talk about. Namely, our profit-taking trade that we executed on Friday on GSK. If you had the position in your account and wanted to close it out per our instructions, you should've had no problem doing so at the recommended buy-back price of $.05 per contract. Here's what we did: Bought back (bought-to-close) all of the GSK March 2018 $32 put options for an official buy price of $.05 per contract as a closing transaction (bought-to-close). Here are the profit details: We originally established (sold-to-open) this put option on October 26, 2017 for a sale price of $.30 per contract, and now we took gains by buying it back (bought-to-close) for $.05 per contract. With the fill at $.05, it locked in a gain of $.25 per contract ($25 for every contract traded) and a return on margin (ROM) of roughly 3.9% in under four month's time. If you like to annualize, that's roughly a 12% 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 concepts. We are not "trading on margin" when selling put options (read my margin primer in the members-only section of the website). 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 $3,200 = $640. 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 $640 per each put option contract sold. Our profit on this trade turned out to be $25 per each put option contract sold. Hence, the return on margin (ROM) comes out to $25/$640 = 3.9%. Also, the fill at $.05 allowed us to capture 83% of the full profit potential ($.25 gain/$.30 full potential = 83%). 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 $.30 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". Locking in early wins is just smart money management and it allows us to free up cash to put towards new trades. If you still have this position in your account, you can opt to buy back tomorrow when the market re-opens. Do not pay more than the recommended price of $.05 per contract. That's all for today. Enjoy the market-free day! Continue to contact me here Regards,
Lee Let's Grab That Cash!