SVU Trade Results And Friday Q&A
Trade Results - Supervalu (SVU) Hello Smart Option Sellers! Let's go over yesterday's buy-back trade on SVU. Considering the stock jumped over $12 per share before the market opened, all the put options were going to be down big time in price, allowing us to buy back higher strike put options to close out the trade. My instructions from yesterday were to have you buy any October 2018 or January 2019 put option with a strike price higher than $10 for no more than $.05 per contract. This was attainable for the October $25 puts or the $January $21 at the time of sending the alert. Why would we do this? Think about it. If the SVU buy-out deal falls apart, it would most likely send SVU stock crashing back down towards $19 or $20 per share (pre-announcement levels). If we were now long a $21 put or $25 put, we could make tons of money off of a big stock drop. We would still have the October $10 put-sell in our accounts, but that option contract wouldn't really go up in value because it's still very far out-of-the-money. Anyway, for official track record purposes only, we'll book the win on the $10 puts and show them as closed out, even though most of you traded a different contract yesterday. If you bought one of the other strike prices, you'll just need to keep an eye on it until the expiration comes around. Most likely the SVU deal will go through as planned and the stock will remain at $32 until it closes later this year. The put options will all end up worthless at that time, but just keep an eye on them just in case. If I see any surprising action on SVU in the next few months, I will give everyone a head's up. For now, here's what we did (for official track record purposes only) Bought back (bought-to-close) all of the SVU October 19, 2018 $10 put options for an official buy price of $.05 per contract as a closing transaction (bought-to-close). Here are the profit details: We originally established (sold-to-open) this put option on June 12, 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 10% in one and a half month's time. Short & sweet! If you like to annualize, that's roughly an 80% 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, and thus, will affect your ROM. The higher the strike price, the higher the margin requirement. And vice versa. This is the main reason 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 $1,000 = $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 $200 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/$200 = 10%. 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". 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! Friday Q&A Q: good morning lee just sold to open premium $25 it showed up in total cash but not in unrealized p and l isn't that immediately in my account ie the premium A: The cash is always immediately put into your account as soon as the put option is sold by you. But, the accounting format in which it is shown can be confusing at times. Until you actually close out the trade (buying it back), you will see a current profit/loss shown on the position while it's active. So, if you sold the option for $.25 per contract, and it's now worth $.20 per contract, you will see a profit of $5 on the position. Even though a full $25 was added to your account (per each contract sold), that amount of money is "on hold" until the trade is closed out. What you will see on a daily basis within your account balances is the current profit/loss on the trade. When we close the trade out for $.05 per contract, you will now see the profit of $20 realized in your account funds. Hope that helps. Q: Hi Lee, It seems to me that sometimes you recommend taking 80% profits, and in some cases just await expiry. Perhaps that is merely because I’m not paying attention. But if true, could you explain why? A: We typically take gains at the 80% level. This happens about 99% of the time for us. In very rare cases will we let it go all the way to expiration. It just makes sense from an account standpoint to take the majority of the gains (80%) and lock it in. No sense in trying to get those last few pennies of profit when there's still much time left before expiration. Your broker is going to make you keep the 20% margin requirement no matter the option price. Once we have 80% of the profits locked in, our margin funds can be released and put towards new trades. Make sense? Q: hi lee is there any truth to the axiom that gaps are always filled that might be relevant to svu that was some gap A: In technical analysis, "filling the gap" is a term to describe a stock's price action where it will usually move either back down or back up to fill the hole that was left when it opens at a price different than where it closed the previous day. You may hear people talk about a "gap" opening. That's exactly what it is - a stock "gapped" open either higher or lower from yesterday's closing price. Filling gaps usually holds true under normal circumstances. Most of the time it can happen, but not all the time. In a case of a buy-out like SVU, it's not likely to happen (fill the gap) unless the deal falls through. Q: hi lee i know you like stocks that miss their earnings fb missed their earnings big time A: Yup, big whiff for Facebook (FB) yesterday. Did anyone take advantage? I may issue an "unofficial" trade for it next week. Stay tuned... 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!
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!