Friday Q&A Hello Smart Option Sellers! Here's your Friday Q&A installment. Q: just one comment on the article re rolling you mentioned the use of a stop loss correct me if i am wrong but didn't you advise not to use a stop loss A: In the very worst-case scenario, if we have to shut down a position, it will be after we've tried to "roll" the trade, maybe even multiple times. If the stock continues to fall and drops 35% below our current strike price, we will unwind the whole trade. We do employ a stop-loss - it's if the stock price drops 35% below our strike price. I don't recall saying otherwise. I don't foresee that situation happening to us very much here though at The Smart Option Seller. In fact, it would be a very rare occurrence. Q: Hello Lee, Timing is critical when selling put options. That's really true when you issue your alerts. Have you considered establishing a "watchlist" for your subscribers? The reason I ask is since I have been a subscriber several trade alerts have come out just after the stock is bouncing off of support and the put options are rapidly dropping in value. Having a watchlist to monitor, subscribers who may be very adept at watching long term support levels could then monitor your watchlist to be able to take more positions more often, For myself I would like to be able to spread out my allocation of positions more to avoid having to overload on a single position to generate income (even though it is a very conservative position) which you always recommend. A: Yes, timing is very critical when selling put options (as with many other forms of investing). Every once in awhile I will put out a list of stocks that I'm watching, but that has lead to some "early" put-sellers who have pushed the option prices down prematurely. For that reason, I'm hesitant to give away the names I'm currently looking at. I try to give everyone the best possible chance to get into the trade, especially by having our text alert system. If you haven't signed up for it yet, please click here. I also try to get us into the trade when I feel the stock is at a turning point so we can make profits quicker. This makes everyone happy. All in all, this is the best way I know how to do it. Q: Lee It looks like my trading platform wants 50% coverage for a margin account, am I wrong?
Regulation T Regulation T (Reg T) governs the amount of money or equity you must have in your account in order to complete a transaction on margin. Under Reg T, you must have least 50% of the value of the trade in your account in either cash or fully paid marginable securities by the settlement date of your trade
A: Reg T margin is what the broker charges you when you borrow money from them to buy stocks. This is called "buying on margin". It is completely different and separate from what we do when selling options. When we sell an option, we have what's called a "margin requirement". The margin requirement is set by your broker - typically 20% of what it'll cost to buy 100 shares of stock at the strike price per each put option sold. If we sell a $50 put option, it'll cost $5,000 to buy the 100 shares if assigned at expiration. But until then, your broker will only require you to hold aside $1,000 ($5,000 x 20%). The $1,000 comes from funds you already have in your account and is placed "on hold" until the trade is closed out. There is no margin interest that you have to pay because you're not borrowing money from anyone. Reg T refers to the margin money you would borrow. We are not borrowing any money. Make sense? Please read my Margin Primer which you can find in the members-only section of the website. Also, if you read some of the recent Alerts when we've taken profits on a trade, you will see the breakdown I give on the margin calculations. Q: hi lee would it be possible to spell out the reasons for your stock selections we have a general idea ie a sell off on earnings but for the specific stock not all of them are on earnings A: Thanks for the question, but that's like asking McDonald's for their secret sauce recipe! Although in 2012, MCD admitted what it was. Click here for the answer. I can't give away all the goods, but what I can tell you about how I make my stock selections - is through years and years of watching stock charts and the patterns they make. Human behavior doesn't change much, especially when it come to stock trading. And that behavior tends to lead stocks to make certain patterns at certain support & resistance areas. Here's a great entry site to help hone your chart pattern reading. It really isn't rocket science, but it does take time and dedication. Sorry, can't give you more than that. Q: Hi Lee, I understand your rule on working an order. It makes a lot of sense, certainly as an individual seller where order volume may be less, but as part of a service such as yours, I would say it is much more difficult. As you know, as soon as your trade recommendation goes out, volume starts moving quickly as subscribers are trying to get their orders in before the sell price works against them. So for your service, while working an order is desirable to get the best price, doesn't reality speak differently? Your thoughts? A: Thank you for your question and comment. Very valid. No doubt, there are times when we issue an alert, the option prices can temporarily move quickly down to our lowest sell level. But we are such a small group, that in the whole scheme of things, the temporary blip doesn't last too long. A majority of the time, our members should be able to get into the trade. Since I really try hard to time the trade to where the stock can see a quick up-move, the put option prices will decline if I'm correct. Most of the time though, the option prices move because of the stock's direction, not so much because we have people all rushing in at the same time. My advice - try waiting awhile. Even maybe a day or so. If it truly is a function of too many people trying to get in at the same time, prices should bounce back to more appropriate levels once the crowd subsides. That's all for today everyone. Continue to hold all other positions as-is. 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!