Friday Q&A...And A Big Announcement!
Friday Q&A Hello Smart Option Sellers! Here's the latest installment of the Friday Q&A. And make sure to read all the way to the bottom for a big announcement. Q: Hello Lee, I have a few questions: - What are the benefits of a Portfolio Margin account? Is it better to convert to it? - How to calculate the margin requirements after the stock drops? I know how to calculate it when I open a position but not when the stock moves. A: These are good questions, and ones I think all of us could benefit from. As many of you should know, when you sell a put option, your broker will require you to keep some funds aside as collateral - called the "margin requirement". Here at Smart Option Seller, we calculate our return-on-margin (ROM) by using a flat 20% margin requirement, which is based on the cost of buying the shares if assigned at expiration. This is sometimes a higher amount than most options brokers, so it gives us breathing room as the stock fluctuates. But, each broker sets their own levels and has their own formula for calculating it. And, the margin requirement could be higher or lower for some of you. This type of margin is called "Regulation T" (Reg T). There is also another type of margin called "portfolio margin", which is based off the whole make-up of all the securities in your portfolio, not piecemeal one-by-one. It basically conglomerates all your risk and then assigns the margin requirement. In some cases, portfolio margin will use less funds than Reg T, and sometimes not. You should be able to play around with each to see how it affects your portfolio. One drawback though - brokers have a minimum account size to even consider you for the portfolio margin. My advice is to inquire with your broker about each one. To answer the second part of your question about the "changing" margin requirements as the stock moves - this is called "maintenance margin", and it fluctuates constantly (higher & lower) based on the price of the stock. Since we use a 20% default rate, it won't change as the stock moves, but your specific broker has a specific formula for calculating the margin requirement. Once you know that formula, just apply it to the put-sell trade as the stock moves around. It's very easy to calculate. Q: Lee, So I took this AAPL trade that you put out in November. I have only belatedly realized that you aren't officially tracking it, although you stated as much in the original alert. So I am presently holding the same AAPL Feb 130 P sold for $0.27, and it is priced at $0.42. Since I just joined your service last summer or fall, this may be the first "unofficial" position I have taken. Are you still holding it, or were you ever? Do you send out update/email when you roll or close unofficial positions? Without your guidance, I might consider coming out -- just since the market seems to have a lot of technical resistance overhead (on the SPX, for example, the triple-lows from late-October, late-November, and early-December are all immediately above us right now). Anyway, would appreciate any guidance you might provide. A: As mentioned in the original alert for this trade - it is unofficial and optional. We don't follow or track unofficial trades, so it's up to you to manage by yourself. At the moment, I'm seeing that put option has a value of roughly $.32 per contract - so almost breakeven for you. It's your call on how to proceed, but did you go into the trade feeling that buying Apple shares at $130 would be a good deal? Or, did you get scared out now because it's fallen a large amount? Opinions change. Apple looked real nice when it was at $230 per share. But now that it fell to the low $140s during the December swoon, I can understand how you might have reservations now. Only you can decide. Q: Sold 20 naked puts on BIG in 08/2018.@.30.for $ 600.00 Strike Price $32.5 Jan.18,2019.Then bought back at $3.90 as part of diagonal options spread,$7800.00,Then sold (20) July $30 @4.20.=8400.00.Bottom line,Fidelity said I am down $5071.41! Where did I go wrong? Please advise A: As part of this roll trade, if BIG ends up staying above $30 per share in July, we will realize full profit potential, which will lead to an overall win for both of the BIG transactions. But we won't know the outcome until July. At the moment, the July $30 put is still worth roughly $2.60 per contract, so you haven't realized enough gain on that position yet to offset the loss on the original January $32.50 puts. That is why your portfolio is still showing a "paper loss" at the moment. Let's say in a month from now BIG is back up to $34 per share, and the July $30 put has moved down to $1.50 per contract. You will see less of a paper loss than before (moving closer to profitability). At this point, the value of your portfolio will be very dependent on the price of BIG stock and the price of the July $30 puts. Q: Hi Lee, just wanted to let you know that none of my trades selling K, NKE and KO got filled today...ugh! I will try again in the morning. If I can do the trade at a strike price one place higher ($45 for K instead of $42.50) would that be the way to go? A: Absolutely! You can choose any strike that you want that fits in with your risk tolerance and comfort zone. Use my trade instructions as a guide, and if you wish to deviate a bit from it - no problems! We have many members who do just that. Q: What does half size order mean? A: Half size just means to cut down the amount of put option contracts you would normally sell. If you typically sell 10 contracts, then move down to 5 contracts. If you only trade 1 contract, then stick with that. Can't trade half a contract! Big Announcement! Vertical Spread Trader (VST) is finally live! Many of you have asked for this new service over the last six months or so, and now we're ready to go!. I'm pleased to say that it is open for new members. Just finished putting the final touches on it. For those who are new to Smart Option Seller, VST will be our new put-option credit spread trading service, which will be run by me. What is VST, you ask? It's just like the put-selling we do at Smart Option Seller, but it has an additional hedge trade attached to it, giving it a limited-loss feature. It will also allow us to tap into a whole new category of stocks, giving us many more trades to consider. With Smart Option Seller, we usually concentrate on stocks that are priced $50 and under. With VST, price of the stock won't matter, allowing us to target many different (but quality) companies. In addition, margin constraints might not be an issue anymore for some of you, allowing you to participate in more trades, as well. Why? Because when trading option spreads, the potential maximum risk is always fixed and known ahead of time, so the margin requirement will never change. Once joining, you will have access to my Primer/Quick-Start Guide, which can help give all the finer details of the strategy. More Details As of now, VST will only be available to current Smart Option Seller members. I'm not opening it up to the general public yet. And just like Smart Option Seller, we will have two different plans - annual and monthly. The cost for the annual is $995 and the monthly is $99. At one point, I was debating on whether to add a third level, which would be to take the same stock as Smart Option Seller's current put-sell trade, but offer it as a secondary put-option credit spread. For instance, we placed new put-sell trades today on both CVS and EMR (I will go over the results on Tuesday). If viable, I would offer up an additional put-spread trade on both CVS & EMR. These extra trades would be included in the Smart Option Seller newsletter to those that would subscribe to this add-on. I can't guarantee that I would find a suitable spread trade for each play, so the cost of this add-on would be smaller, something around $299 for the year. I haven't made a final decision on this yet, but if there's also enough interest in it from some of you, I will offer it shortly down the road. I'm hoping that those of you who expressed interest in VST are still gung-ho to join. I'm really excited about it and I know it will add another dimension to your option-selling successes. Click here to go to the VST webpage to read more about it, and of course to sign up! Can't wait for you to join me. I envision us hitting the ground running early next week. That's all for today. Have a great long weekend. The markets are closed on Monday for the Martin Luther King Jr. holiday. 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!
Current Portfolio Continue to work all other trades as instructed and continue to hold all other open positions as-is. See the Current Portfolio below for current prices & instructions. Note on the Current Portfolio - if you are a new subscriber and don't have a position yet on any of our trades, make sure you enter your order at the original recommended prices. If you are unsure or have any questions, please ask us!