Where Do We Stand?
Where Do We Stand? Hello Smart Option Sellers! Happy Halloween! Hope you get some good treats, or give some out, or both! I wanted to check in with everyone to give my assessment of what's happening in the markets and where we stand with our positions. I've gotten a few emails from Smart Option Sellers wanting to know the next steps if prices keep falling. As of today, we're having a good rebound, which is a nice relief, but selling could creep back in. Jumping back into bullish positions (or put-sells) is only smart once you (or I) feel the tide has turned back up. A lot of technical damage has been done over the last few weeks, and the market needs to digest what happened. We won't go back up in a straight line. It will be a meandering move back up. People have been scared out of their positions, so they will be tepid to jump back in. We'll see rebounds in fits and starts. This is the bottoming process. It happens after every major down-move. The good thing for us as put-sellers, is that the longer stocks meander, time decay will take over and erode the option prices. That's exactly what we want! But what happens if prices keep dropping? Well, first off, our strike prices are still out-of-the-money and below the stock prices. That is our downside cushion at work. Yes, some of the put option prices have gone up above our entry levels and given us paper losses at the moment. But remember, we will only be on the hook to buy the stock at the strike price if the stock falls below it at expiration. It will never be worse than that. Are you still comfortable with the stocks I've chosen at the prices I've chosen? Let's analyze AMD, since that one seems to be the closest to the strike price. AMD stock is currently near $18, and we've sold the $15 strike price, giving us $3 of cushion. We sold the February 2019 $15 puts for $.31 per contract, and now they're currently worth $1.28 per contract. This gives us a paper loss at the moment. Over time, as the stock hovers at current levels, the put option will keep declining. Next week, the put option could be worth $1.20 per contract even if the stock is still at $18. That's time decay working for us. In a month from now with the stock at $18, the put option will be worth $.90 per contract, and so on. If the stock drops to $13 per share in December, the put option will probably be worth about $2.20 per contract. And on expiration day in February, if the stock is still at $13, the put option will be worth $2 per contract, as that will be its final intrinsic value. The intrinsic value is the difference between the final stock price and the strike price. You can never lose more than what the intrinsic value is if you hold it until expiration. If the stock is at $13 on expiration day, we would buy the stock for $15 per share, giving a paper loss of $2 per share. Then we could start selling covered call options while we wait for the stock to rebound. Or, we could "roll" the trade and not take possession of the stock. Rolling would allow us to stretch the put-sell trade out to a longer expiration date without having to take ownership of the stock. But at what point would it be beneficial to finally give in and take ownership of the stock? Is AMD at $13 good for you? Is $10 good for you? What about our put-sell position in Alcoa (AA)? We sold the $28 puts. Would you be happy owning AA at $28? Or would you want to buy it at $25? These are the decisions we'll need to make when it comes time. Ten years ago when everything was falling apart, I bet no one wanted to buy stocks. But looking back, it would've been the buys of the decade if you had the balls to step up. At some point, we'll need to step up too. Stocks have been the best performing asset class over the last 100 years as a buy-and-hold strategy. Don't count it out. I know we're a put-selling service, but why not aim for more gains if it's possible? Holding stocks for price appreciation, especially if it's a large move up, will give much better returns in the long run than just keeping the put option premiums. We've never experienced that scenario yet in all the years I've been running this type of service, but when (if) we do, I know you all will be very happy. In the last alert, I talked about rolling the AMD trade. It's still on the table, so don't worry about me abandoning that possibility. I will let you know if we decide to do it. I'm still here assessing new trades, and if this current rally looks like it may hold, we will certainly jump in. That's all for now. Continue to hold all other positions as-is. Contact me here Regards,
Lee Let's Grab That Cash!