top of page

Market Update And Trade Results On FIVE

Market & Position Update Hello Smart Option Sellers! Lots to talk about today. I'm back from my frustrating travels. I had gotten caught up in the East Coast weather the other day which put me a day behind on manning the workstation. As good as technology is and the gadgets to make mobile work easier, it's just not the same as being in the office with all my "usual" screens and equipment. Regardless, the story of the day has been the market pull-back over the last two trading sessions. It's been strong and swift just like we saw at the end of January and early February. No doubt some of it is fear of Trump's potential new tariffs against China, talk of possible pre-emptive strikes against North Korea, staff shake-ups in the White House and the Fed's raising of short-term interest rates. All of those factors combined can (and has) lead to nervous folks selling out of their stock positions. Is it warranted? Maybe, but not so much in my opinion. Once again, the market has gone up a long way in just the last 18 months. Gyrations are part of the market, especially when the moves have been so one-sided for such a long time. And when everyone hits the exits at the same time, it makes the selling more pronounced. Have all publicly-traded companies all of a sudden turned out to be duds and unprofitable? Of course not! We've been seeing some great corporate earnings reports lately, which is ultimately what leads the stock market to new highs. But, there are always individual companies that can have a disappointing earnings call, while others can get caught up in sector changing dynamics. Case in point - our put-sell positions in ORCL, GIS, K & LUV have taken a little beating over the last few days as those stocks have fallen quite a bit. But this is the reason why we sell the strike prices so far away from the current price of the stock - it allows for downside movement and room for error until the stocks move back up. You might be well aware that the put option price on these positions are now higher than where we sold them. This is going to happen when stocks fall in unison. You will see red in your accounts as these positions are currently underwater. Even though the stock prices remain above the strike prices, the put option values can (and will) move around. The reason why the option prices remain elevated is because the market prices in the chance that the stock can keep moving lower and possibly surpass our strike prices. Case in point - Amazon is trading near $1,530 per share, but you can currently sell the January 2019 $365 put option for about $.20 per contract. That's right, someone will pay you $.20 per contract to buy Amazon for $365 per share for a nine-month trade. That's an $1,165 per share discount to its current price. You interested in buying Amazon for $365? The market prices in these extreme movements, and since there is nine months left before expiration on that trade, someone thinks Amazon could fall that far. It's the same with some of our current plays - as long as there is time left before expiration, the market will assign these put options value even though the stock still remains above the strike price. So for now, we will hold our trades as-is and if we need to take defensive action, we will. Five Below (FIVE) We've been filled on our buy-back order on FIVE which closes out this trade for a profit. FIVE came out with earnings the other day as I had mentioned was coming up, and the market liked the results. The stock has rallied about $4.50 per share the last two days which allowed us to get filled on the buy-back trade. Here's what we did: Bought back (bought-to-close) all of the FIVE May 2018 $39 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 December 20, 2017 for a sale price of $.25 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 $.20 per contract ($20 for every contract traded) and a return on margin (ROM) of roughly 2.56% in three month's time. If you like to annualize, that's roughly a 10.3% 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 $3,900 = $780. 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 $780 per each put option contract sold. Our profit on this trade turned out to be $20 per each put option contract sold. Hence, the return on margin (ROM) comes out to $20/$780 = 2.56%. Also, the fill at $.05 allowed us to capture 80% of the full profit potential ($.20 gain/$.25 full potential = 80%). 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". Locking in early wins is just smart money management and it allows us to free up cash to put towards new trades. Congrats to those of you who were involved. Last Word In light of the recent volatility in the markets and the down-moves, I will hold off on adding any new plays at the moment. No sense in getting in front of the freight train now if we can obtain better opportunities in the future if the market keeps dropping. I also would not add to any positions that you currently hold, even if the put-sell prices have gotten higher. But, the decision is ultimately up to you. If you feel like you'd like to add more, then go for it. Some of you might also see your current margin requirements increasing, which leads to less free cash on hand. This is the broker's way of protecting themselves and making sure you can cover these trades if we have to buy the shares. Keep on eye on your current balances so you know where you stand. That's all for now. I will get the Q&A alert out to everyone later today. Continue to contact me here Regards,

Lee Let's Grab That Cash!

Recent Posts
bottom of page