Market Update And Friday Q&A
Market Update Hello Smart Option Sellers! Happy Friday the 13th! Wonder if this will be a lucky day for everyone. Or, will we get the usual Friday sell-off? Regardless, I see faint and early signs that we may be bottoming out here. Practically all the stocks indices have successfully bounced off their 200-day moving average levels, which is typically the last line of defense for the bulls. We may still see some back and forth for a bit, but I believe the bulls are re-gaining control. Although the volatility can make you crazy watching the wild price swings, the fact of the matter is, is that our put-option positions are losing value every day. That's good! If the stock prices just end up back in the middle of the large price swings, that works in our favor, as they are keeping above our strike prices, and time decay keeps eroding their value. Time decay is a very powerful force when it comes to option selling. It's basically our best friend. Even if we don't always get the stock direction we need, we can always count on time decay to help our cause. Big Lots (BIG) Our BIG $40 strike put-sell position expires next Friday, and the stock is currently near $42 per share. As of now, it's still a race to see whether the stock will remain above $40 by next Friday. The plan will be to definitely buy this put-option back sometime early next week after we let the weekend of time decay kick in. As of now, this put option has a market of $.15 bid/$.25 offer. We opened the position with an official $.27 per contract sale price back on January 4, 2018. At the time, the stock was at $55-$56 per share. It's lost roughly $13-$14 per share since then, but yet our put option has gone down in price. That's time decay working for us. I'm sure anyone who was bearish at the time in January and decided to buy the $40 put options, is not the happiest person right now. They were right on the direction, but not so much on choosing the right strike price. Trading options correctly is critical. As far as buying options (we sell them), it's hard to stomach being right on your directional call, but yet not being able to profit on it. That's the plight of most options buyers. If the stock stays relatively stable until Monday, then the bid/ask should be closer to $.05 - $.10 bid/$.10 - $.15 offer at that point. And then we will buy it back. All other positions remain a hold for now, and if the markets look like they're continuing to hold their ground, we may jump into some new plays next week. Friday Q&A Q: Lee, with the direction the market seems to be going, ( with Trump's help,) is there any reason to consider covering the puts that are in the black and accepting 40% to 60% profit? A: Hi, super good question! Absolutely, if you feel that the stock may continue to drop lower and you don't want to take the chance of losing any built-up gains, then there's nothing stopping you from doing just that. What could be wrong with locking in a gain if you have it? Nothing! For us in our service, we use the "80% Rule" as our guide, but if I don't have much confidence in the stock anymore, then I would surely have us get out of a trade early and take the current profits. As mentioned in the text above, we're in a situation right now with our BIG put-sell position where we could certainly lock in a small gain right now if we wanted, but I feel that we'll be able to do a bit better next week right before expiration. If anyone doesn't want to wait for my signal, you're more than welcome to close it out at any time. Ultimately it's your money, so you should always do as you see fit. Q: These gains/losses have no effect on our puts if they expire or we buy to close, is that correct? A: Option values fluctuate higher or lower during their lifespan. You will undoubtedly see paper gains and paper losses along the way, as well. But as long as the stock doesn't move below the strike price, the put option value will keep eroding, and can eventually expire worthless. Or, if we buy it back early for a cheaper price than what we sold it for, we will also realize a gain. The hard part sometimes is sitting through all the noise, which is what we're experiencing now. But you have to remember, if you get into the put-selling game, you should always use a stock in which you would be comfortable owning for the long haul if it came down to that. Q: Are you worried about our VXX trade? For the last couple months Vxx has had an inverse relationship to the market. If we are currently not selling put options because we are afraid of market downside, are we still expecting the price of vxx to go significantly lower? (I understand that the price of Vxx is supposed to be related to volatility) A: VXX (like the VIX), will move inversely with the stock market. When I made the recommendation to sell the VXX call spread, it was during that nasty late January/early February market swoon. My thought process for making this trade was that the market would go back up and the VXX would go back down. And that's what happened...for awhile. Then the market recently tanked again towards the end of March and the VXX went back up again. As of now, we're just slightly underwater on the VXX trade. We want it's value to go back down again. The only way for that to happen is for the market to have a sustained upmove. We have two more months until the June expiration on this trade and it will come down to whether the market regains its senses, and its uptrend. Time will tell. Since this is a spread trade, there is a finite maximum gain and a finite maximum loss we can incur. We sold the spread for $.31 per trade (our maximum potential gain), which exposes us to a potential maximum loss of $.69 per trade if the VXX finishes above $46 at expiration. Right now it's at $46.32. Keep holding for now. Q: GIS puts are quite a bit higher today. Is is safe to sell more July 40 puts? Or should one sell 37.5 puts? What say you? A: GIS is another stock that is down in the dumps at the moment. It's been holding near the $45 level for a few weeks now, and the longer it builds a base there, the better chance it has to moving higher. That's what I'm hoping. Yes, our put option is worth about $.75 per contract right now (we sold it for $.28) putting us underwater. I don't advise selling more of that same strike at this time, but if you're keen on selling more of something, look for a lower strike on a further-out expiration date. Depending on which way GIS stock moves in the near future, will dictate whether we'll have to undertake any defensive action. Thanks for the questions! That's all for now. 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!