Market Update And Friday Q&A
Market & Position Update Hello Smart Option Sellers! Well, we made it through another week (almost!). The markets had started out strong but have been kind of fading as we move towards the weekend. We are practically at the same level now as we were on Monday. Volatility has faded as well, which can be seen in this chart of the VIX. As a refresher, the VIX is a measurement of how erratic (or not erratic) the market is predicted to be in the near future, which is calculated by using the options contracts on the S&P 500. The VIX is also used a a "fear" gauge, as it measures how panicky investors can get. When markets sell off, the VIX jumps, and when markets are calm and rises, the VIX goes down. The VIX also indicates the "expensiveness" or "cheapness" of options prices. When the VIX risies, option prices tend to rise, and vice versa. For option sellers like us, we like when volatility rises, as it gives us more money when we sell options contracts. But at the same time, an exploding rise in volatility can be quite scary, as it indicates the market is selling off violently. This can be nerve-wracking for even the most experienced traders, including myself. We all think the world is coming to an end and we could be forced into making bad trading decisions. This usually leads to puking your positions are the wrong times. So yes, we like rising volatility, but the violent rises I can do without. Anyway, volatility is coming down, which helps with our current put-sell plays (and our VXX call spread). As of now, all of our positions except for two are doing well - meaning they are getting cheaper so we can eventually buy them back to lock in a profit. The two positions that are giving us a bit of grief are Kellogg (K) and General Mills (GIS). Both of these stocks share the same sector - the ready-to-eat cereal and commercially packaged convenience foods. Although they both have healthier options within their food line-ups, the majority of their items still fall under the quicker, lesser-nutritious choices. With healthier food trends always on consumer's minds, the push for these items to be carried at the grocery store gets stronger. Companies like GIS & K know this and need to step up. With our put-sell positions in these two companies, the stocks are still above our strike prices, but we are losing the stronger downside cushions we once had. Kellogg still has an $8 per share cushion above our strike price and the position expires in June, while GIS stock is currently about $3.50 above our strike price and expires in July. Out of these two positions, GIS is the more pressing. The downside cushion is shrinking and we still have three months before expiration. The question is - do we think we can ride it out until July? I'm not sure if we can, especially if the overall market continues to fall, as this will pull all other stocks down with it. So we will keep an eye on things and if we have to adjust the trade, we will. Most likely this will entail "rolling" the GIS position to a further-out date and a lower strike price. They way I approach situations like this, and by way of looking at the charts, I usually assume that at some point, quality, long-time companies such as GIS & K can get their act together and stem the down-move. We give ourselves plenty of room for that downside cushion, but since each company has been steadily falling for 18 months, patience may be running out. Rolling the trade is the next logical step, or pulling the plug completely is a decision we might have to make in the near future. So for now, continue to hold all positions as-is. Friday Q&A Q: hi lee do you want low volume in the pull back prior to the put trade you look for a dip in price to get in however not a start of a extended down trend the volume might be a indication if it is a temporary pull back ie light volume indication of a small correction or high volume on a start of a down trend A: Hi, although I'm familiar with volume statistics as it can apply to a stock, I've never really used volume as an indicator prior to getting into any kind of trade, including our put-sells. For me, price of the stock and the patterns it makes on the charts (and its overall fundamental picture) is what helps me make my final decision. I'm not saying that looking at volume wouldn't help, as it probably would. I'm just saying that as of now, volume doesn't play a role in my decision-making. Q: Hi Lee, Why did you not suggest rolling the BIG position? A: Good question, and it's one that I considered strongly. In the end, BIG just looked too shaky on the charts to ignore. It turned higher early this week but has now fallen off again. I couldn't rule out that it might continue its fall, and with earnings being announced next month, I decided it was just not worth the stress of possibly sweating it out anymore. I will certainly keep an eye on it over the next month and if another trade is warranted, we will move forward. Q: What do you think of adding to my position of GIS at it's present price of .55, or thereabouts? A: I believe I answered this in last week's Q&A and have already put the instructions in the portfolio to not add to your positions at this time. Currently, the position is worth about $.86 per contract, so selling more at $.55 would've been a bad move at the time. GIS is in a downtrend, and we may have to roll the position in the near future. If anything, I would only recommend selling a GIS put-sell position on a further-out expiration with a lower strike price than what we have now. Thanks for the questions. To refresh, hold all other trades as-is. And as I finish writing up this alert, the market is hitting lows for the day, so we may end up seeing another down Friday. Grrrr! That's all for today. Have a great weekend! 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!