Profit Results - LLY
Profit Results - Eli Lilly (LLY) Hello Smart Option Sellers! Another profitable trade locked in. We had no problem getting filled on yesterday's buy-back order on LLY. Here's what we did: Bought back (bought-to-close) all of the LLY July 18, 2018 $60 put options for an official buy price of $.04 per contract as a closing transaction (bought-to-close). Trades went across the tape at $.03 and $.04 per contract, so we'll take $.04 as the official mark. Here are 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 $.04 per contract. With the fill at $.04, it locked in a gain of $.21 per contract ($21 for every contract traded) and a return on margin (ROM) of roughly 1.75% in four month's time. If you like to annualize, that's roughly a 5.25% return. You might notice, that although our dollar gains are typically the same for each trade, our ROM can fluctuate quite a bit. The reason being - the strike price has everything to do with how much margin you will be required to hold aside. The higher the strike price, the higher the margin requirement. And vice versa. This is one of the reasons why I like to focus on lower-priced stocks - typically $50 and under. 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 $6,000 = $1,200. Your specific margin requirement at your broker may be higher or lower than that. If you are unsure, just ask them. Your margin requirement will also have an effect on your final ROM. So for this trade, our margin requirement is $1,200 per each put option contract sold. Our profit on this trade turned out to be $21 per each put option contract sold. Hence, the return on margin (ROM) comes out to $21/$1,200 = 1.75%. Also, the fill at $.04 allowed us to capture 84% of the full profit potential ($.21 gain/$.25 full potential = 84%). 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". 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. Continue to hold all other positions as-is. Contact me here Regards,
Lee Let's Grab That Cash!