Friday Q&A Hello Smart Option Sellers! As the trading day has worn on, the selling has intensified. As I type, we're sitting near the lows of the day. The good news for us as put-option sellers is that time constantly marches on, and as each day passes, the option value erodes, even on the weekends. So we have two full days (Saturday & Sunday) for our put option positions to get cheaper. Works for me! I understand these sell-offs can be scary, especially when you see the put option values increasing, moving our holdings into the red. But, just like all other sell-offs, this one will be bought back up too. So, continue to stay cool and hold your current positions as-is. Now, onto the questions: Q: I was hoping you could help me with my first put trade. I am using TD Ameritrade and I'm not familiar enough with the terminology to be sure I am selecting the right options in order to Sell to Open. In the Buy & Sell menu, I have selected the Options tab, and now I have a choice of options strategy. The options under this are Single order, Covered Call, Vertical Spread, Calendar Spread, Straddle and Strangle. There are a few other options here I don't know as well. Order type: Limit, Market Stop, trailing stop, etc and also Time-in-Force. I'm sorry to bother you, I'm just not sure for my first trade. A: Hi, welcome aboard and thanks for the question. Although I do not have an Ameritrade account myself, I can help with the terminology as it's pretty standard across the board. We are executing single order trades, and within the instructions I give in the alerts, 99.9% of our orders are "limit" and "GTC" (good-til-cancelled) orders. I'm not sure if you initiated these trades from within the option chain itself, but you can certainly do that. This entails clicking on the bid price of the put option within the option chain and it will auto-populate the sell order for you. At that point, you can designate the sell-to-open, limit and GTC features. And if you ever have more trouble, you can just call the broker themselves and ask for help. Q: What do you think about preferred stocks? The dividends are really nice! I was told by a retired NYSE floor trader to look into them. A: Although preferred stocks are not my specialty, I do know they can provide a nice return because of their "bond-like" features. They don't fluctuate much (at least the stable ones don't), so the capital appreciation isn't going to be like regular stocks, but it's the dividend yield which buyers of preferred stocks count on the most. Here's a handy list of all preferred stocks. If you're looking for an ETF of preferred stocks, the one that I keep track of is the IShares U.S. Preferred Stock ETF under the symbol of PFF Q: Based on the size of one's portfolio margin what is a reasonable number of contracts to place when selling naked put options? Is there any way of assessing risk? A: This question is probably the one I get the most, and unfortunately it's not the easiest to answer only because it has a lot to do with your personal risk tolerance. My go-to answer is always to start with selling one contract to start so you can see how much margin it takes to hold the position and how your account balance ebbs and flows from start to finish. You can then increase your contract size when you're more comfortable with how the system works. Now of course, if we were to get assigned on any of the put options, you would need the full cost of the stock on hand to pay for it. For instance, if we sold a $40 put option, you'd need roughly $800 in margin funds to sell one contract and $8,000 to sell ten contracts. If we had to buy the stock at expiration, you'd need $4,000 to buy the 100 shares or $40,000 to buy the 1,000 shares. Remember, one option contract = 100 shares. Do you have that much money in your account to allocate for that size? If we have multiple positions open (like we do now), you have to allocate your margin funds to take on all the positions and decide how many contracts you want to sell. Not always the easiest task. And the decision of course is highly dependent on how large your account is. A bit of trial and error is going to help you figure it out, and over time, you'll get a feel for how many contracts you can play with. Q: GIS $40 Put - I sold this put at 0.35, it’s now 0.79. Any argument to sell more now? A: As mentioned in today's earlier alert, I do not recommend selling more of any position even though it's gone up in value. I want to wait to see when we may have landed on some support in the market. If anything, I would look to sell deeper out-of-the-money strikes to give you more breathing room, if you're adamant on getting more trades done. Officially, we're holding off for now. That's all for today. Have a great weekend everyone! 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!