Profit Results - LUV
Profit Results - Southwest Airlines (LUV) Hello Smart Option Sellers! Yes, another week gone by. Happy Friday! Let's go over the results of our fourth locked-in winner in the last two days. Here's what we did: Bought back (bought-to-close) all of the LUV June 15, 2018 $42.50 put options for an official buy price of $.05 per contract as a closing transaction (bought-to-close). This put option was offered at $.05 per contract most of the day yesterday, so if you had your order in, you should have been filled. If not, just keep your order working "GTC". Let's go over the profit details: We originally established (sold-to-open) this put option on February 5, 2018 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 2.35% in three and a half month's time. If you like to annualize, that's roughly a 8% 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 $4,250 = $850. 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 $850 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/$850 = 2.35%. 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". As mentioned yesterday, we were going to lock in a bit less than that. We will do that from time to time. Locking in early wins is just smart money management and it allows us to free up cash to put towards new trades. Great job everyone. That's all for now. I'll have the Q&A alert out a bit later today. Continue to hold all other positions as-is. Contact me here Regards,
Lee Let's Grab That Cash!