Friday Q&A
Friday Q&A Hello Smart Option Sellers! Let's get to the questions! Q: hi lee thanks for the response to two of my inquires i have to query the analysis of the risk of a roll you said there can be a double loss that is true in one respect when the first trade is closed for a loss that is it there is no carry over the trade is close and you are out then to offset the debit you sell another put that premium is money it the bank at this point you have offset the loss on the first trade the premium cant be taken away if it expires there is no loss repeat as necessary A: This question is in response to my analysis in a previous Q&A alert of how we execute a "roll" trade if necessary as a defensive action. In the roll, we would buy back the original put-sell position (possibly for a loss) and re-sell a new put-sell trade on the same stock in a further-dated month using a lower strike price. The sale price of the new put option would be large enough that it could cover the loss taken on the original trade, as long as we could close it out profitably down the road. If the stock ends up moving higher, we would be able to close out the new trade and book an overall profit between both trades. What I mentioned in the last Q&A is that there was a possibility of taking a double loss if the stock continues to move lower. How would that occur? Well, if the stock moved low enough to invoke our stop-loss action (which is if it moved 35% below the strike price), we'd have to close the newer put-sell by buying it back too. This would surely entail a loss on the trade, as well as the loss on the original put-sell trade. That would be a double loss. In theory, you could close out the new trade for a loss and roll again, continuing the position even further into the future. But if the stock keeps falling, this could really make for a bad trade. Probably best to just shut it down and take your lumps. Q: Lee, So I have been in the newsletter we have only sold stocks. Do you not like to sell index etf’s SPY/QQQ/EWZ)? If so why is that? Thanks! A: Hi, selling puts on indices is great, as they are very stable movers. The problem is, that stability leads to much lower premiums when selling the options and/or you'd have to use strike prices that are too close to the stock price for my liking. Using individual stocks gets us more bang for our margin dollars. Plus, indices don't have earnings announcements, which is why it makes for some of the best times to sell put options on individual stocks. Thanks for the question. Q: Hi Lee, This is a follow-up to your last Friday Q&A regarding credit spreads. From your book, I know you had a past service trading commodities using credit spreads: 1) Do you still trade commodity options in your personal account? If not, why not? You seemed to be very good at it from the examples in the book. With commodities, can't you sell further OTM and get better premiums versus equities? Before you mentioned that there were not that many people interested in the service but I think if you educated them on the benefits, that would change. I would be very interested in this type of service & would pay more if you can't get a larger pool of subscribers. It's nice that commodity options are mostly uncorrelated to the stock market. I think commodity options are perfectly suited to credit spreads (especially for risk control). 2) Another idea would be to use credit spreads for stocks > $50 and sell naked for stocks < $50. That way you could trade higher priced stocks that just keep moving up in price (tech, etc). Also, let's say next year we have a 20-30% bear market in equites and it takes some time for the correction to play out. We could sell bear call credit spreads during the downturn and then sell naked puts near the bottom (with elevated volatility & premium). That way your service could trade in any market environment. Your current put selling service has a great win rate (100%). With credit spreads if you won 75% of the trades (3 out of 4 trades) and used a 200% of premium stop loss, it would also be a great service. I know that you mentioned that you have to sell closer to the stock price to get the premium, but I think your technical analysis skills are up to the task. BTW, I am very happy with your service; keep up the great work! A: I applaud the effort to get a credit spread advisory going. I've had a good amount of members ask me about it. I'm starting to hear everyone loud & clear! Sometimes with enough mass uprising, things can change. I am definitely looking into how I could run a profitable option credit spread service while keeping the win rate high enough. I'm running through some scenarios to see if it's feasible. As far as commodities go, that ship has long sailed for me. After 2009-2010, when a majority of the commodities pits went all-electronic, it was too hard for me a sole trader to compete with the big boy machines. They just moved the markets too erratically for me. And the "spoofing" habits made it even harder. Spoofing is an illegal tactic of adding a ton of fake orders to a bid or offer price to make it seem like there's lots of interest on one side the market. When that happens, it encourages other "real" bids or offers to join the market which can then make the market move unexpectedly up or down. Anyway, I still follow the commodities markets, but nearly enough to justify starting a new service. Sorry! I'll try to give an update on any potential credit spread service when I can. Q: Hi, Lee, Further on spreads. Thanks for your comments on them, whose punch line I think is that risk of assignment in greater than nakeds. Yes, but premiums are better, 2X or more, margin reqts much less, and you are long the insurance put 5 points lower as a loss limiter. Yes you could still lose money, but my guess on average you'd do quite a lot better. I looked at some numbers, using WMT, one that I have been unable to do naked because of the high margin reqt. Used option numbers before the open on 6/19 on Fidelity when WMT had closed at 83 ish. For a Sept exp spread, 80/75, net spread was 1.12; for Dec spread, 80/75, net spread was 1.37. Admittedly 80 is a little close. So, looked at 75/70, for Sept exp, net spread was 0.42; for Dec exp, net spread was 0.73. All them a good deal better than the typical .25-.30 we do naked. Maybe I did it wrong, but I did check. Used the listed Bid for the Sell and listed Ask for the Buy. Maybe WMT is atypical, so I'll look at a few others. Easy. I'd encourage trying a spread in your service. However, you are the expert and see more than I see. You said (yet) in your comments. A: Thanks for pointing everything out. And yes, you're correct with WMT's numbers. I'm grateful for this feedback, and it helps me immensely. I can't see everything of course, so I appreciate bringing all of this to my attention. Maybe the credit spread advisory will happen sooner than we think! Q: hi lee got filled on cat at $43 this is a very safe trade how many fills are you going to require to follow it A: Hi, congrats on taking advantage of today's unofficial trade on CAT. But since it's unofficial, I will not be following it. You're on your own! Use the same guidelines for this trade as we would for any other trade. Stick to the 80% Rule, or if you want, you can wait to see what happens in January. Good luck! Q: SVU - Should we cancel? A: Nope. Leave it as-is with a "GTC" designation. I know it has moved away from those of you who couldn't get in on the original go-round. I may offer up an alternate play on it next week. Stay tuned. Well, 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!
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