Friday Q&A Hello Smart Option Sellers! Nice comeback in the market yesterday. It had been down for a majority of the session and then rallied back in the last hour. Impressive. Plus the market is up again today as I type. Let’s see if we can build on that bump and start building a base here. Before we get to the questions though, let’s discuss a few items regarding our positions, specifically BIG and AA. When the market is in a nice uptrend for long periods of time, you can see how well put-selling works, as a majority of the time, we can close out the trades for a profit without much trouble. This can sometimes lull you into a false sense of security that the strategy can never fail (or any other bullish strategy, for that matter). But we’ve seen in the last two months what can happen when we get a full-on rout in the market – you start to worry and get concerned, yes? Seems like everything is going to bust and we’re doomed to lose all our money. With put-selling, you always need to be cognizant of the fact that you might end up with shares of stock dropping into your account that you’ll need to pay for. You may also feel that this is something that you don’t want to happen, or the fact that you weren’t aware that it was even possible to happen. I’m telling you now, be aware of it, because if the bear continues, we may end up with stock in our accounts. But… That isn’t a bad thing. Because part of the path to riches is building a long-term portfolio of quality stocks. If we are capable of doing that, you can end up seeing great appreciation in the value of your account. Psychologically it’s hard though to buy stocks while everyone else is panicking, especially if stock prices keep dropping. But as I’ve said in a previous alert, no one rings a bell letting you know that the bottom is in. Finding the floor is a process, much of it entails whipsaw action, meandering, fits and starts, etc. But eventually a base is formed, bottom feeders come out and value is found. This is when the uptrend begins again. Are we there yet? I wish I knew. But you have to start dipping toes and nibbling a bit along the way so at least you have a foot in the door when the bottom actually is declared. This is what I’m trying to do with Smart Option Seller, and this is where we possibly are with BIG and AA. I don’t know yet if we’ll have to buy shares of those two companies, as I don’t know where the stocks will finish at expiration. But I’m sure most of us wish we had bought plenty of stock at the bottom of the sell-off in March 2009. Prior to that date, we were all in panic mode, but looking back ten years later, we’re all regretting not getting in, yes? But no one knew the bottom would be found in March 2009. It just happened. So let’s try together as a team to keep one foot in the door while we conservatively and defensively protect what we already have going on. And remember, stay in your comfort zone and don’t over commit funds that you don’t have. I know it’s tempting to want to go all in with collecting the upfront cash that put-selling offers, but you need to still understand what the end game can bring – buying shares of stock that require payment. Good? Ok, on to the questions. Q: NFLX Vertical Spread - Hi Lee, Are you keeping an eye on the optional vertical spread using 1/18/2019 250/245 P options? I'm not sure how to proceed if NTFX does not rise in value between now and the 1/18/2019 timeframe. A: Awhile back, as I was discussing the specifics of the new option credit spread service that will be launching in January (Vertical Spread Trader), I gave an example of a NFLX put option credit spread that would be typical of the service. At the time, I believe NFLX stock was trading near $375 per share, and the strikes used in the spread were the $250 & $245 puts, which were well over $100 below that stock price. Fast forward to current prices, and NFLX is now near $255, but dipped as low as $231 a few days ago. The key with put option credit spreads (as with naked put-selling) is for the stock to not move below the sold strike of the spread ($250). What once seemed unfeasible, meaning NFLX wouldn't drop $125 per share, now is a reality. How do you want to handle? The good thing with option spreads is that you have a built-in safety net - you know what your maximum risk can be at all times. In the NFLX case, the risk can be no larger than $500 per spread. To calculate that, you subtract the strikes from each other and multiply by 100. ($250 - $245) x 100 = $500. At this point, here's what can happen: 1. You sweat it out and wait to see if NFLX finishes above $250 by expiration in a few weeks. 2. You buy back the spread at its going rate and lock in a profit or loss. 3. You roll the spread out to a newer, more conservative spread. 4. Do nothing. If NFLX finishes below $245, both options will be in-the-money and automatically exercised and assigned. They will offset each other and disappear from your account. Maximum loss would occur ($500 per spread). Hope that helps. Q: Lee- Had one more question......perhaps you can offer me perspectives on this situation. I am a relatively conservative investor with most of my investments being in conservative Cash Balance, 401k plans etc.... My “play money “ I was more aggressive with and have/had the bulk of it in Chinese stocks that I truly believed in and researched....specifically BABA and JD.COM. I can get into the many factors that influenced these investments but the bottom line I am very underwater in both these positions and wonder if options or even selling “low” and moving laterally into other equity positions over time may be the answer. I still believe in these companies long.....just look at the demographics in China trade war short term not withstanding. Your thoughts would be appreciated! A: Hi, of course I cannot give individual investment advice, but once a stock holding is underwater, many participants want to know about "recovery" strategies. Selling covered calls or call spreads is one way to recoup losses, as the collected income can help buffer the drop. But you need to make sure to sell the right strikes, especially if the stock rallies back up. If you sell strike prices that are too low and then get your stock called away, you may end up taking an overall loss on the trade. If you have a broker that can help explain this to you, it would be beneficial. Also, buying long-term, deep-in-the-money (DITM) call options is a way to play bullish ideas with tons of less money at risk. Have you read the chapter on this strategy in my book? I've given advice in many of the articles I've written over the years to forget buying stocks. Buy DITM call options instead. This may be an option (pun intended) for you going forward. Q: Hi Lee, I hope you are well! By rolling over the trade to July what else you are achieving besides buying time to see if the time decay takes care of the problem.What happens in the meantime if the Bear Mkt continues and BIG becomes smaller and smaller.It is possible that BIG drops to 20 or 15.Is it not? Is there any other way out?. I want to get rid of this one monkey from my back! I do have couple of more monkeys on my back which are keeping me awake at night. Suppose the Mkt does not turn around, then what? A: Hi, all good questions. Of course no one knows when the market will stop going down. I talked a bit about this at the top of the alert. With all of our put-sell trades, we have an ultimate stop-loss point where we'll completely bail on the position if it keeps dropping. At that point, we'll take an unfortunate loss. This occurs at 25% below the strike price. Even if we roll a few times and the stock keeps dropping, 25% below the current strike price will be our stop-out. I wouldn't hold any trade all the way to zero (unless we started at maybe a $2.50 strike price). For anyone needing advice to help contain other underwater stocks, buying very short-term, cheap put options is always a method. This could be a continual action over the course of a few months, and it could allow for quick gains. At the same time, those cheap options could expire each month and add losses to your account, as it is the same with any home or auto insurance that we never cash in on - lost money. Or, the final straw - just pull the trigger, sell, and take the loss. I know it will hurt, but you'll start to sleep much better at night. Well, that's all for today. Continue to hold all other open positions as-is. Have a great weekend! Contact me here with fills, comments, questions or concerns. Regards,
Lee Let's Grab That Cash!