Common Question About Put-Selling
Common Question About Put-Selling Hello Smart Option Sellers! While we wait for the market to settle itself a bit and give our current positions a chance to catch their breath, I want to go over a common question that I receive about put-selling and account balances. I briefly touched on this topic last week in regards to seeing your account balances change as the market moves around. Let me go into a bit more detail. Option prices move around just like stock prices do. And with those price movements, you will see not only your account balance move higher and lower, but your margin requirements, as well. For instance: If you bought an option and its price goes up, your account balance will go up too. It's moving in your favor. If you bought an option and its price goes down, your account balance will go down too. It's moving against you. It works a bit differently when selling options. If you sold an option and its price goes down, your account balance will go up. It's moving in your favor. If you sold an option and its price goes up, your account balance will go down. It's moving against you. This last scenario is what many of you are experiencing right now. Some of our put-sell positions have moved against us in this recent market down-turn. This means that the put option prices have gone up and above where we sold them. That puts downward pressure on our account balances, because if you tried to close out the trade, it would lock in a loss. So basically, your account is showing a paper loss at the moment. This also means that your margin requirement to hold the put-sell positions has gone up, which will leave you with less free cash to use on other trades. As the stock prices move lower towards the put option strike price, your broker will require you to show a bigger good faith deposit (margin requirement) in case we actually have to follow through and purchase the stock. If you keep an eye on your margin requirement (which you can view in your account balances), you can see how it will fluctuate from day to day. The margin requirement can also move lower during the course of the trade if the stock moves higher. This gives the broker more assurance that the put option will most likely expire worthless, and they won't need you to hold as big of a margin requirement as earlier. Bottomline, our hope is to have the stocks not move below the strike price. Even though you may be showing a loss on the positions right now, when the put option values starts to erode again, you will see your account balance go back up. It's no different than how your account balances work when you hold individual stocks or ETFs. I hope this helps clear up some of the questions you may have had. If not, keep sending them my way. That's all for now. Continue to hold all positions as-is. Continue to contact me here Regards,
Lee Let's Grab That Cash!