A New Trading Service?
A New Trading Service? Hello Smart Option Sellers! Happy Friday! Not much happening in the markets this week except for lots of chop and back & forth action. As frustrating as that is for some, it's actually great for us. Why? Because as stocks meander, the put option prices decay faster. That's exactly what we want. So sit tight, relax, and let's wait for the new trades to show themselves. On another note, let's talk about something different today. Over the past few months, I've had requests from a number of you about starting up a new service that consisted of selling option credit spreads. For those unfamiliar, option credit spreads are another amazing income-generating type of trade, just like put-selling, but with minor differences. I wrote about option credit spreads in my book, as one of my favorite all-time strategies as a way to profitably navigate the commodities markets. As it applied to the stock market though, I felt that put-selling was better suited. That's why I created Instant Money Trader (my previous newsletter) and Smart Option Seller. But after hearing from many of you and looking at it again from various angles, I now feel that selling option credit spreads could definitely be traded profitably within the stock market as well. Just like put-selling, credit spreads collect cash upfront and also have a margin for directional error (using my method). This is good. Credit spreads comprise two option trades in one - a sale & a purchase. The difference between their prices is what creates the "spread". The sold option is more expensive then the purchased option, hence, you receive a credit into your account. There are two types of credit spreads - call option credit spreads (directionally bearish) and put option credit spreads (directionally bullish). For our purposes, we would only engage in put option credit spreads as it takes advantage of the ever-bullish environment of the markets (same as put-selling). And, both of the put options in the spread would be of the same expiration month. One of the biggest reasons why some of you have asked for the service is due to the reduced margin requirements - which is absolutely true! Since the spread entails two options, the maximum risk is capped, hence, it lowers the margin requirement significantly, which can help with smaller accounts. For instance, a Wal-Mart (WMT) $75 put option that could be sold for $.25 per contract has a typical 20% margin requirement of $1,500 per contract, and an open-ended downside risk. But unlike that single put-sell, a WMT credit spread could entail selling the $75 put option for $.25 per contract and buying the $70 put option (hypothetical) for say, $.10 per contract. The spread would create a credit of $.15 per spread ($.25 - $.10). The margin requirement and risk would be the same in this case - $500 per spread. In order to calculate the margin requirement and risk, you just need to take the width of the strikes and multiply by 100. ($75 - $70) x 100 = $500. So for every spread sold, the margin requirement would be no more than $500, which is much less than the single put-sell's margin of $1,500. The maximum risk is severely curtailed as well, down to only $500, whereas the single put-sell's downside risk can theoretically be unlimited. It all sounds great. What's the drawbacks? The drawbacks are the potential size of the upfront credits and possibly having less downside cushion, which all depends on which strikes you choose. If you wanted a larger upfront credit with the spreads, you'd have to pick strike prices that are closer to the current price of the stock - thus leaving you with less downside cushion. Using the WMT scenario. if you wanted to have at least a spread credit of $.25 (like the single put-sell trade), you would have to engage a spread of selling the $82.50 put option and buying the $77.50 put option, for example. You would get the same $.25 credit, a margin requirement of $500 and maximum risk of $500 per spread, but you would have $7.50 less of downside cushion. How? Well, the sold option of the spread in this case would be the $82.50 strike, which is $7.50 per share closer to WMT's current stock price, as compared to the larger cushion you get with selling the single $75 strike put option. Would less downside cushion sway you from making the trade? Depends on how strongly you feel about WMT's future price trajectory and how good your stock picking abilities are. You see, with put-selling, I know I can offer trades with tons of downside cushion. Although we typically don't need all of it, it's still nice to have. I feel confident though with my ability to pick stocks that are due to bounce, so giving up a little of that downside cushion might work out fine Also, knowing that the risk is capped if your direction is wrong, can still help you sleep soundly at night. If the spreads are initiated when the stock's on a downswing (like we do with put-selling), then the chances are stronger that the spread can work in your favor quickly as the stock should most likely bounce from the fall. To remind as a comparison, if the sold strike of the spread was the same as the single put-sell's strike ($75 for WMT), then you'd have the same downside cushion, but yet a smaller credit ($.15). It's a trade-off. Regardless of which way we play it, the bottom-line is that credit spreads are another viable, high probability form of trading, that I think it could work very well for us. Credit spreads would also open us up to a whole new level of opportunities as we'd be able to use it on higher-priced stocks (like WMT) - ones that I typically stay away from for the put-selling newsletter. It would also allow many of you to stretch your margin dollars further - as you could potentially engage in selling more contracts. Now, with all that said, I need to know the level of interest before embarking on a brand new service. If there is no interest, it makes no sense to start it up. So, here's my simple survey: What is your level of interest in a new option credit spread newsletter? Very interested Not interested Not sure Tell me more Click only one of the links above (and only once please!) to register your vote (must use the original emailed Alert in order to vote). I will give an update after a week or two to make sure everyone has a chance to vote. I understand that spreads may be new to some of you, so I can certainly give a more detailed write-up of what they are, how we would use them and what to expect. As far as cost, I had been toying with the idea of just creating an add-on service to Smart Option Seller where I could use the same stock and offer up a comparable credit spread within the same trade alert as the put-sell trade. So in essence, you'd get two different types of trades in one single alert. This would be a very low priced add-on service. In addition to that, I could offer a full-blown spread service with possibly more trades than we typically get with just put-selling. Since the price of the stock wouldn't be an issue anymore, we could use much higher priced stocks which opens us up to many more opportunities - more picks! The price of that type of service would be more expensive than the put-sell service, but of course not outrageous, either. Selling credit spreads adds a layer of comfort knowing what your ultimate risks are ahead of time. Plus, the margin requirements can be extremely small when compared to selling naked put options. In addition to choosing your survey answer above, give me your thoughts as well. If we move forward with this new service, I want to make sure I can provide an excellent product that can meet the needs and expectations of the customers. My option knowledge is deep, and there are countless strategies that can be employed, but as a newsletter service, there are only a handful of them that are truly worthy of your attention. Let's find the right ones! Lastly, as far as when it could be launched - that would depend on the level of interest and how much time it might take for me to get it up and running. If it's a go, I could see it being launched within a few months. I hope this gets everyone excited, as there's always safe, effective and other profitable ways to make money in the markets. That's all for now. 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!