Trade Results - MRK...And Friday Q&A
Trade Results - Merck & Co. (MRK) Hello Smart Option Sellers! Congrats on another profitable position. Here's what we did: Bought back (bought-to-close) all of the MRK October 19, 2018 $45 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 May 11, 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 2.2% in under three month's time. If you like to annualize, that's roughly a 9% 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 $4,500 = $900. 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 $900 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/$900 = 2.2%. 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: hi lee i was looking at the buy-to-open SVU strike $25 that has a pretty low delta in your book there is a chapter called buy all the stock you want at half price the premium will move dollar for dollar if the delta is 100 with the SVU delta at 5 the premium wouldn't change much correct me if i am wrong A: You are correct. With SVU almost a certainty to be bought out at $32.50 per share, all of the put options below $32 will expire worthless at that time. But until that day comes, there's always a small glimmer that the deal could fall apart. This is the reason why you still see trades happening for lots of the put options, including us trying to buy certain strike prices. Even though those strike prices currently have an extremely small delta, they will explode in price if the deal falls apart and SVU plummets back down to $20 per share. We opted to buy the higher strike prices because they only cost $.05 per contract. Q: hi lee, if a DITM (call option) trade loses money, can you exercise the long call and write a cc (covered call) to offset the loss? is this doable? A: Although we run a put-selling service, I will answer questions from time to time that are outside of our core system. This question is in regards to the deep-in-the-money (DITM) call options that I wrote about in my book. Absolutely, you can execute the trade as you mention in your question, but you don't need to exercise the DITM call option to write a covered call. The DITM call option is already a "surrogate" for a long stock position, so if you sold another call option against it, it would just be considered an option spread, not a covered call. The spread would have the same results. So in conclusion, it really doesn't make sense to exercise the DITM. Just use it as if it was already a long stock position. Hope that helps. That's all for today. 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!