Sunday Q&A Edition
Sunday Q&A Hello Smart Option Sellers! I think this might be our first ever Sunday edition, as I wanted to get to the questions today instead of pushing it out another week. But first, here's my take on the market action from Friday: Sometimes all it takes is a little patience. The market enjoyed another strong upswing on Friday, with the Dow Industrials finishing up 725 points. It was a great way to finish the week. One item I'd like to bring up before we get to the questions is the fact that our put-sell play in Alcoa (NYSE: AA) has now moved back up above the original January 2019 $28 strike. AA stock finished near $28.35 per share. We had recently rolled that trade down to the July 2019 $25 strike as a defensive measure. But what if we never had rolled? Well, we'd still be sweating it out, as AA would needed to finish above $28 for us to walk away unscathed. Expiration is in 12 days from today. Think AA could stay above $28? No one knows, but that's the game of chicken we might have to play sometimes as put-sellers. My ideal is never to roll, as it not only saves a commission, but also leaves less time for the stock to drop again. Since we've lengthened the trade out to July, we've now opened ourselves up to more time for AA to possibly fall back again. Or, it may not. Our consolation is that we've lowered our risk in the trade and captured an extra $.30 credit. Plus, the market was completely oversold, so a continued bounce is more likely. This will cause the July $25 put option to decay very quickly. We're also saw a nice pop in Big Lots (NYSE: BIG) too. It's currently near $30.10, which is slightly above our new $30 strike price, but still lower than our original $32.50 strike price. Anyway, my point is that stocks will bounce, sometimes back above the strike price, making a roll unnecessary. That's my lesson for today. Now, onto the questions. Q: Hello Lee, Happy New Year! One question this afternoon; Can the broker assign a put sell 6 months before the expiration date? For example the put sell does not expire until June 21,2019. Can they assign the stock long before the expiration date i.e., in December 19, 2018? If so, under what conditions? A: Technically, options can be assigned at any time before expiration. But remember, it makes no sense for the buyer to exercise the put option unless the stock price is trading under the strike price. And even if that's the case, chances of early assignment are still very slim. I've mentioned many times over the years in response to this question that it's not in the best interest for the put-buyer to exercise early because they would lose out on extra money. Today I'm going to explain why that is the case. Let's say a stock is at $50 and someone buys a $45 put option for $3 per contract with 6 months to expiration. Two months have passed and the stock is now at $42 per share and the $45 put option is now worth $6 per contract. The put-option buyer is ecstatic that the stock has fallen and wants to exercise the option early since it has fallen below the strike price. Here's why that is a huge mistake: If the put-option buyer decided to just sell the option instead of exercising it, he would make a $3 per contract gain on the investment. He bought it for $3 and now sold it for $6. That's a 100% return. But, when someone exercises an option, they are not entitled to the whole value of the option contract. They are only entitled to the portion of the option that is currently in-the-money. Since the stock is now at $42 per share, the $45 put option is in-the-money by $3 per contract. In order to figure that out, you subtract the current stock price from the strike price ($45 - $42 = $3). Once the buyer exercises the option, they will now have a short position in the stock and only get credited the $3 in-the-money profit, forgoing the extra $3 of gains. While the stock's currently at $42, it's like the option buyer selling the stock at $45 per share instead of $48 per share. See the difference? Don't ever exercise an option early, unless you can get the full value of the contract. When would that be? Usually on expiration day only. I've always said that 99.9% of put options won't get exercised early even if the stock has fallen below the strike price. But there's always those few uninformed option players who might not understand how in-the-money value works. Hope this helps. Q: Lee- Should I enter any/all of these positions now? A: My advice is to not engage in any of the positions, even if you don't have a stake yet. The instructions in the portfolio is to not make any new trades. There will be better trades to make with more downside cushion once I feel confident the market may be bottoming. Of course I can't stop you from making a trade if you wish. But if you do, at least look at some of the lower strike put options in those stocks. Give yourself some cushion. Q: Lee, Happy New Year. I am behind in reading your last couple of emails with year end and all that sort of thing. What is the status of your spread service. Will it be separate from the current put selling service or an add on or what and when will it start? A: Vertical Spread Trader will hopefully launch by the end of January. Still getting the finishing touches on everything and need to check the systems to make sure it all works. I will give out all the information, including the pricing, in the next few weeks. That's all for now. I look forward to a great 2019 for us. Continue to hold all other open positions as-is. Contact me here with fills, comments, questions or concerns. Regards,
Lee Let's Grab That Cash!