Trade Wrap-Up And Friday Q&A
Trade Wrap-Up Hello Smart Option Sellers! See what a little dip in the market could do for us? We were able to get filled on both the Wal-Mart (WMT) and the Lowe's (LOW) put-sell trades. Let's go over the official results. Lowe's (LOW) LOW stock came off about $2 per share yesterday, which put it right near where it was trading on Wednesday when I first wrote up the put-sell alert. On that day, I had mentioned that the $60 put option had a fair value of roughly $.35 per contract, but the stock took off higher as usual, and some of our members put the pressure on the option with their offers at $.30 per contract. With the stock drop yesterday, it allowed the rest of the gang to get filled as the contract traded between $.30 - $.41 per contract by day's end. We'll take the official mark at an average price of $.33 per contract, as most were filled near that lower end of the range. Here's what we did: Sold (sold-to-open) the LOW July 2018 $60 put options for an official sale price of $.33 per contract as an opening transaction (sold-to-open). With the stock market coming off again this morning, we will definitely see higher put option prices today. Everyone should definitely be filled by now on LOW, but if you haven't, you can still get your sell order done at even higher prices today. Wal-Mart (WMT) Again, with the whole market down so far today (and yesterday), it took WMT with it, and has reached the downside objective I was looking for. This allowed us to get filled on the $55 put-sell we placed yesterday. Here's what we did: Sold (sold-to-open) the WMT September 2018 $55 put options for an official sale price of $.25 per contract as an opening transaction (sold-to-open). As of now, everyone who had their sell order in at $.25 per contract has been filled. If you haven't, you can still do so at good prices as it's currently sitting at $.26 bid/$.28 offer. I have to believe we may see some more downside ahead, and the implied volatility of the options will definitely tick up, making option prices even more expensive. As you know, as volatility picks up, it has a direct affect on option prices, forcing them higher, so this would be a good time to discuss what happens to our open positions in this case. You will see some of our trades going against us temporarily, meaning, we can see "paper" losses at the moment. This is just like stocks falling below your buy-in price. Option prices fluctuate too, and they can certainly move against you. The one thing you need to remember is that as long as the stock price is above the strike price of our put options, we are in good shape. And that's exactly how we stand today, so no need for any adjustments or defensive action at this time. You might also see your margin requirements go up too. As stocks fall, brokers will require you to hold more funds aside in case the stock dips below the strike price. This is done to protect the broker and to make sure you'll have the full funds to buy the stock in case of assignment. The fluctuating margin is also referred to as "maintenance margin". We're not anywhere near being assigned on any stocks, but I just want everyone to be aware of how the margin works and how it affects your free cash position. Ultimately, if we end up having to buy the stock, remember, we'll be getting in at extremely attractive levels. Friday Q&A Q: Hi, Lee, I've been using Fidelity for put sell trades. Do you have any feel for whether other brokers have lower requirements for margin and which ones specifically? A: Well, I don't personally have an account at Fidelity, so I don't know their margin rates. In today's competitive market, most brokers should be setting a 20% margin requirement (or less) for uncovered put-sell trades like the ones we execute. You can certainly call around or try to find on the broker's website what the margin requirements are for these types of trades. Many of our members use Interactive Brokers (IB) and Think or Swim (TOS) which is owned by TD Ameritrade. These are the two most sophisticated and options-centric brokers out there. Other names such as Schwab, E-Trade, E-Option, etc. can be looked at. Here's an article that could help. Q: just sold 30 contracts of low? for net of $3000 when will that show up in my net acct. value? A: Well, if you netted $3,000 for selling the LOW put options, then that means you sold 100 options contracts for $.30 each. That's a very healthy position. The $3,000 should show up immediately in your net account value, but you will be required to hold at least $120,000 in margin funds aside while the trade is active (assuming a 20% margin requirement). You can talk with your broker to make sure you understand how the money is being affected in your account value, how much is being held for the margin requirement, and how much free cash you have to initiate other positions. Q: Lee, I have a question about yesterday: by selling the (LOW) 65 at $0.50 and not the 60 at $0.30 - [by my calculation] I received a 66.66% increase for taking on a 8.33% increase in risk...am I assessing this correctly? A: Well, by your measure yes, your calculations are right. You're getting an extra $.20 in premium (66% increase) and you only increased your risk by $5 ($65 strike - $60 strike) which is the 8.3%. For me, I'd rather have that $5 cushion of using the $60 strike instead of getting the extra $.20 premium. Even though your calculations make it seem like it's worth it, having another $5 cushion in the stock market is a huge benefit that I'd rather have instead. Another thing that might help to make these kinds of decisions is to look at the probability of the stock getting to $65 vs $60 in the time allotted. Using a probability calculator (not shown), I'm showing there's a 5.3% chance that LOW could end up below $65 at expiration and a 2.28% chance that it would end up below $60 at expiration with the stock price currently at $87 per share. That's extremely low for both scenarios and I don' expect LOW to hit either one of those levels. But in the end, I'd still rather take an extra $5 of cushion over a $.20 bump in option premium. Good question. And just for the record, we have many Smart Option Seller members who take my stock pick and decide which strike price meets their own risk parameters. Many times they'll choose different strike prices than my official trade recommendation. Entirely up to you. Q: Hi Lee; I can see how our GIS put went down by 4 c because the stock went up 5c,as that is the norm. I fail to understand how the price of VZ stock went up 30c yet our put also went up. I've seen this a few time and wonder .... Why? A: As long as you're looking at the current bid/ask price of each option and not the "last" trade price. Those two numbers can vary widely, only because the last trade could be very old, sometimes from days or weeks ago. But yes, the scenario you describe can certainly happen, and the biggest culprit is most likely the implied volatility of the options. If the market thinks that VZ stock will be making larger moves in the foreseeable future, they will price in higher option prices to shield themselves from undue risk. And the put option prices can actually move higher if implied volatility spikes, even if the stock price moves up. I've seen instances where we get large drops in the market and even the call option prices will go up because of spikes in implied volatility. Hope that helps. 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!