Thursday Q&A

Thursday Q&A Hello Smart Option Sellers! Here's your next installment of the Q&A alert. Enjoy! Q: good morning lee is delta a good indicator of probability A: For those of you unfamiliar, Delta is a by-product of the option pricing formula and is known as one of the "Greek" outputs of the model. It is represented by a percentage number between 0% - 100%. Delta has a few uses, or meanings: 1. Delta tells you how much an option price will move in relationship to the underlying security's move. For instance, if the option (put or call) has a delta of 60%, its price should move 60% of what the underlying security moves. If the stock is at $50 per share, and it moves up to $51 per share, a call option with a value of $.50 per contract should move up to $.80 per contract, which is a move of 60%. This is the best definition and practical use of delta, in my opinion. 2. Delta tells you how many contracts you need to buy or sell of an underlying security to hedge your option position. For instance, when I traded crude oil options on the NYMEX, I would engage in an option position that would give me a directional stake in the underlying crude oil futures market. Since we were not in the game to predict the direction of crude oil futures, we needed to directionally offset any option position we took with an appropriate futures contract position. If I bought crude oil call option contracts, if would temporarily give me a bullish stake in oil, which I would immediately have to offset by selling crude oil futures contracts. But how many should I sell? Well, the call option's delta told me how many I needed. This definition of delta is only used by professional traders and hedgers, and in my experience, is not part of any individual retail investor's trading activities. 3. The last use of Delta comes down to your question - is it an indicator of probability? Although technically it is, it can be very deceiving if interpreted the wrong way. Let's say your option has a delta of 40%. What it truly means is that the option position has a 40% chance of expiring in-the-money (ITM). But just because an option expires ITM doesn't mean it will be a profitable position. That's where the confusion can set in. For instance, if you bought a $50 call option for $3 per contract, the only way you will make a profit is if the stock ends up above $53 per share at expiration. Anything lower than $53 will give you a loss of various levels. Let's say the stock finishes at $51 at expiration. Well, it certainly finished in-the-money (by $1 per share), but you lost $2 per contract on your investment. So, yes, Delta can predict whether an option will finish in-the-money, but it doesn't necessarily predict whether you'll end up with a win. Make sense? Good question. Q: Hello Lee, I have a few questions: -Few weeks ago, I sold call options on AMD. Its price kept going higher and higher but they didn’t take my stocks until the expiry date. In my opinion if they took the stock 2 weeks before the expiry, they could make double the money, the stock price went down the last 2 weeks. My question is why did they wait until expiry, is there a good reason to do it? -Can you please recommend the best options and stocks/technical analysis books in your opinion? I want to switch to full time trading in few years and I’m collecting resources, I already have your book and few others. A: Whoever bought your call options will be making money on them as the stock moves up. Options fluctuate up and down in price and can be traded back and forth in the market. There's no reason for them to call away your shares, it's just as easy for them to sell the call options back into the market and lock in their gains in that manner. A majority of investors who buy and sell options typically offset the trade at some point down the road by unwinding it instead of exercising it. Only a small fraction of options are exercised. And if they are, it typically happens on expiration day. As far as good options books to read - there's a lot of garbage out there and lots of very technical books that won't do much for you. Stick to the very simple books that describe a handful of easy strategies to learn. Most retail traders don't need lessons on the Greeks or institutional-level hedging mechanisms. My book is certainly a great starting point. Try this link for a few that might interest you. The small cheap paperbacks can offer lots of good information. Chart-reading books - Author John J. Murphy is a good starting point. Click here and here. Hope this helps. Q: Hi Lee - I’m new and wanted to get a sense of a few questions. Here are my main questions: I have only seen a couple trade updates but haven’t been able to get in as the market has moved very quickly as you seem to have many subscribers. Do any market makers have your newsletter and then can manipulate the market? The GPS example recently got me thinking since it moved so quickly. You had fair value/trading at 0.30 I believe and it quickly went to 0.24. Is there a specific time during each week that you send the email? I have the text but if it was more consistent on timing, that would help as I am very busy. Do you have any good reading material on position sizing? I’m new to uncovered puts. I’ve done cash secured and just want to get a sense of what is reasonable where I don’t take too much risk. A: Some of my members back in The Instant Money Trader days asked that very same question - whether any of the market-makers subscribe to my service. Funny! First off, I wouldn't know. I don't ask for your occupation when signing up. Please re-read yesterday's alert in which I discussed this very topic of option prices moving quickly away from us. It's not completely a function of too many of us. It's more of the depth of the option markets in general. Believe me, we don't have enough members at Smart Option Seller to make a huge dent in the markets. And look at the GPS play now - the put option is back up in price and valued at roughly $.30 per contract. Patience paid off if you waited. As far as a set timeframe for trades - sorry, I can't guarantee that. Trades can show themselves at any time of the day, and I get them out to you in the most timely fashion that I can. I've always been suspect of trading services that can provide you with new trades on a set day at a set time. How does that happen? I can't provide that. On the position sizing question - I don't have any resources to offer except that with us, start small and move up from there. It won't take you long to get a feel for the types of trades I recommend, how they perform, and how it can affect your account balance. Start with one contract and work your way up from there. Q: Just got setup with ally investing by investing 4K into my trade account. With the idea that I would get up to Approx 10k . I attempted to place the put sell to open for GPS, however was told that I needed to have 25k in my trade account in order to place the order. He indicated that was true through out the industry. He indicated once I would be allowed to put 20% as a down payment against a naked put. A: Sorry, Ally is giving you bad information. It is not industry standard to need $25K to open an account to sell put options. That might be their policy, but not for all brokers. Also, I wouldn't consider Ally one of the more progressive or experienced options brokers out there. Look at Interactive Brokers or TD Ameritrade's Think or Swim platform for alternative brokers. Well, that's all for today. I'll be out of the office tomorrow so 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!

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