Profit Results - Kellogg

Profit Results - Kellogg (K) Hello Smart Option Sellers! Mission accomplished. We had no problem buying back our Kellogg put-sell position yesterday for a nice profit. In fact, many of you were able to do better than the official instructions. Buy prices went across the tape between $.01 to $.05 per contract, with a majority near the $.04 level, so that's where we'll take the official mark. Here's what we did: Bought back (bought-to-close) all of the K January 18, 2019 $55 put options for an official buy price of $.04 per contract as a closing transaction (bought-to-close). Here are the profit details: We originally established (sold-to-open) this put option on August 29, 2018 for a sale price of $.27 per contract, and now we took gains by buying it back (bought-to-close) for $.04 per contract. With the fill at $.04, it locked in a gain of $.23 per contract ($23 for every contract traded) and a return on margin (ROM) of roughly 2.1% in four and a half month's time. If you like to annualize, that's roughly a 5.6% 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. Think of it as collateral. 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 $5,500 = $1,100. 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 $1,100 per each put option contract sold. Our profit on this trade turned out to be $23 per each put option contract sold. Hence, the return on margin (ROM) comes out to $23/$1,100 = 2.1%. Also, the fill at $.04 allowed us to capture 85.2% of the full profit potential ($.23 gain/$.27 full potential = 85.2%). 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 $.27 per contract. We 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. Congratulations to those of you who participated in this trade. If you're still holding the position, you can opt to close it out today, or you can choose to see if it will expire worthless after Friday's close. Up to you. Officially, we are out of the trade. Alcoa (AA) Remember, AA reports earnings after the close today. Re-read yesterday's alert for my take on the optional (and unofficial) hedge trade. That's all for now. Continue to hold all other open positions as-is. Contact me here with fills, comments, questions or concerns. Regards,