Profit Results - GPS & INTC
Profit Results Hello Smart Option Sellers! We had a good day yesterday as we were able to lock in profits on two of our open put-sell positions. Due to the October & November market swoon, it took a bit longer than usual to close them out, but we still came out ahead. One of the main reasons why we were able to sidestep the carnage is the fact that we choose very deep out-of-the-money (DOTM) strike prices. This gives us a big advantage and a huge cushion for directional movement. One of the primary goals of selling put options successfully is figuring out where a stock will most likely NOT move to. That point is so critical because if you have any experience in picking stocks, and are somewhat successful at it, then you surely can pinpoint areas with greater confidence where a stock won't go to. It's easier to win in the options trading game when mimicking the attributes of casinos and insurance companies. Those two businesses make their money by betting on events that won't happen. See where I'm going with this? Most option investors spend their time trying to figure out what price a stock will move to, and when. And they fail miserably. It's just too hard to do. That time constraint (option expiration day) is the #1 killer, in my opinion. We bet against those option buyers - like the casinos & insurance companies. The bottom-line is that even when markets are falling and others are losing money, we can still come out as winners. Works for me! Let's go over the results. Gap Inc. (GPS) Our GPS put-sell position traded in a range of $.04 to $.06 per contract yesterday, with the majority being at $.05 per contract. That's where we'll take the official mark. Here's what we did: Bought back (bought-to-close) all of the GPS December 21, 2018 $21 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 July 10, 2018 for a sale price of $.26 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 $.21 per contract ($21 for every contract traded) and a return on margin (ROM) of roughly 5% in about four and a half months. If you like to annualize, that's roughly a 12.5% 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 (you can 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 $2,100 = $420. 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 $420 per each put option contract sold. Our profit on this trade turned out to be $21 per each put option contract sold. Hence, the return on margin (ROM) comes out to $21/$420 = 5%. Also, the fill at $.05 allowed us to capture 81% of the full profit potential ($.21 gain/$.26 full potential = 81%). 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 $.26 per contract. We also 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! Intel Corp. (INTC) Everyone should've easily been able to close out this trade yesterday at the recommended price of $.06 per contract, as it was offered there the whole time. Here's what we did: Bought back (bought-to-close) all of the INTC January 19, 2019 $35 put options for an official buy price of $.06 per contract as a closing transaction (bought-to-close). Here are the profit details: We originally established (sold-to-open) this put option on July 27, 2018 for a sale price of $.28 per contract, and now we took gains by buying it back (bought-to-close) for $.06 per contract. With the fill at $.06, it locked in a gain of $.22 per contract ($22 for every contract traded) and a return on margin (ROM) of roughly 3.1% in about four months. If you like to annualize, that's roughly a 9% return. Also, the fill at $.06 allowed us to capture 78.5% of the full profit potential ($.22 gain/$.28 full potential = 78.5%). This was just a tad under my 80% Rule threshold. Great job everyone! For anyone who did not close out either trade yesterday, and wishes to do so, make sure your orders are "GTC" at the recommended buy prices or cheaper. That's all for now. Continue to hold all other positions as-is. Contact me here with fills, comments, questions or concerns. Regards,
Lee Let's Grab That Cash!