Friday Q&A
Friday Q&A Hello Smart Option Sellers! Let's get to the questions. Q: if you go further out on the expiration the higher the premium since we are using your 80% rule what difference does it make? A: It's true that the longer the expiration date, the higher the premium when selling the option. Why wouldn't we just sell longer-dated options then? Because of "time decay". As each day passes, the option loses a little bit of its value, regardless of which way the stock moves. That is the definition of time decay. As option sellers, time decay helps us. But time decay is not linear, as it doesn't move at the same rate throughout the life of an option contract. It speeds up the closer you get to expiration. So the theory goes - it's best to sell shorter-dated options so you can take advantage of the accelerated time decay. Also, if you sold longer-dated options, you're relying more on your ability to pick the correct direction of the stock to help you make a profit. As stocks go up, put option values go down. You need to be a really good stock picker to make money when selling long-dated put options. Now, since time decay really ramps up with the shorter-term options, getting the stock's direction correct isn't as important because the time decay effect can outweigh whether the stock moves in the right direction or not. Since I don't hold myself out as the world's greatest stock picker, I'd rather rely on time decay to help me make a profit on easier terms. This is why we choose shorter-dated options. For us, that length typically is two to five months for the expiration date. Hope that helps. Q: hi lee re gis do we cut the cord and take our lumps? i take that to mean we cover now for a loss what are your thoughts on letting it ride with the risk of being assigned then writing a covered call A: GIS has been a bit perplexing to me. The consumer staples sector has not been a favorite for awhile, as I've written about this before. Stocks such as GIS, K, KMB, HSY, CL, CLX, have all been declining since 2018 started, and some for longer. At some point, there is going to be an equilibrium where these companies will be seen as a good investing value. I'm surprised it's gone on for this long. These are not fly-by-night companies. They are household, name-brand stalwarts that have been in existence for decades. So what's our plan? Do we jump ship because the stock keeps falling? Where's the bottom? That's the $64,000 question. The decision to bail out of a stock can be because of a number of reasons - you don't believe in the company anymore, it has hit a stop-loss level, or because it has breached a critical area of the charts. Any, or all of those things can play a part. I truly still believe in GIS as a solid company, but the fact that it keeps going lower and getting closer to our strike price level might be a cause for concern. But should it be? I mean, if you wanted to buy shares in the company now, you'd be getting in at a good level compared to where the stock has been over the prior five months. You'd probably feel pretty good that you waited to buy it. But what if it keeps going lower? It certainly can. There's no way to ever tell what the exact perfect entry point is for an investment. If you like it, you buy it. Right? My only concern is the prolonged downtrend it's been in. I thought it may have found a bottom near the $45 level, but it has since breached that area. Is $40 the next level of support? Could be. And if so, how long will it linger there. Maybe $40 would be a great area to get a stake in GIS. The question for us is - can we wait it out for another two months until expiration, and will GIS remain above $40 in that timeframe? I know some of you may be concerned about where we stand on this, especially as it applies to our put-sell position. We are currently underwater on this play, and it's the only position in the red. But remember, with our put-sell entry price of $.25 per contract, it would leave us with a cost-basis in the stock at $39.75 per share ($40 - $.25 = $39.75) if we get assigned. And yes, we can then sell covered calls against the position and collect another round of cash. With all that said, we are going to hold and see how it plays out over the next few days to weeks. We can always "roll" the trade if need be. I will continue to send updates on this trade as necessary. Q: Good Morning Lee, While option premium still remains low, due to low volatility, I am thinking of upping my selling in the more aggressive futures markets. I really like the way gold/silver/crude have been moving and think there is an opportunity to make some great gains with credit spreads. I have read your book and was wondering what your process is on credit spreads. I am currently trading a diagonal call in SLV. A: At the time of writing my book, I was still heavily involved with the commodity markets. One of the safest ways to play those high-dollar markets is to use option credit spreads - which was one of my favorite strategies at the time. The process is pretty simple - decide your projected direction of the commodity, and then sell the corresponding put or call credit spreads. Stick to the shorter-dated options - I'd say three months or so, and of course use the out-of-the-money strikes for both legs of the spread. Since I don't actively play in those markets much anymore, I can't give too detailed of a synopsis of specific markets. Good luck! Q: Lee: Are Kroger and Cardinal Health on your put option radar by any chance. Have been watching both...........maybe too late now. What do you think? ATT looks as though it would also be a good play A: As much as I would like to comment on every stock that members email to me for advice, I just can't offer that kind of individual assistance. Trust me, when I see a stock worthy of a put-sell, I send it out ASAP. AT&T and Kroger have a spot on my watchlist, and of course if it meets the criteria, we will enter. As of now, Cardinal is not on my radar. Remember, if you find a stock you like and would really consider buying it, there's nothing holding you back from entering a put-sell. You don't need my blessing or confirmation to do it. I have faith in all of you! Q: I’m trying to get a feel for how many contracts to use, obviously depends on size of my account and how much risk I want to take. But using one contract doesn’t do much. If I end up getting assigned I probably don’t want 10 contracts of stock. I’m not asking for specific advice just a general “rule of thumb” and how much risk is there of getting assigned. A: I always try to keep the risk of assignment to a minimum, but at some point, we may end up buying the shares. Yes, you will have to decide how many potential shares you "could" buy if it comes down to that, as this will then help you figure out the corresponding amount of put option contracts to sell. I always say start with one contract, but since that doesn't seem to be enough for you, start ramping up. Many members have been in your shoes and they've since moved up to five contracts and then to ten, and so on. It can be a trial and error kind of thing for a bit. You'll be able to gauge your comfort level after being with us for awhile, and then you'll know how many contracts to use on a regular basis. Q: Should I use the Implied Volatility or a mixture of Implied and Historical Volatility in the calculations? A: This question is in regards to the probability calculator we use to gain insight into how likely it is for a stock to move to a certain level by a certain date. You can use the one here on our site. I've always opted to use the implied volatility (IV) for the calculator, only because it's a real-time guess of what the future holds. But there's nothing wrong with using a combo of the two to gauge the future levels. There's no right or wrong answer here. But if you want to err on the side of caution, use the volatility that has the higher value. This can help give even more cushion for error. That's all for today. Have a great weekend! Continue to hold all other positions as-is. 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!
