Trade Update - AMD
Trade Update - Advanced Micro Devices (AMD) Hello Smart Option Sellers! Well, the market seemed to like AMD's earnings numbers last night and has sent the stock higher at the moment. Earnings are always a crapshoot in my opinion. Some companies release good numbers and see their stock fall, while others produce not-so-stellar numbers and watch their stock rise. In the case of AMD, EPS were in line, but sales and revenue were a little light. Also guidance for Q1 2019 was lower than expected but full-year guidance for 2019 was better than expected. There's too many ways to spin the numbers and too many numbers to look at. That's what I think. That's why I rely more on chart reading. Everything that is public knowledge about the company's fundamental data gets displayed in the charts. It's worked for me all these years, and I will continue to operate that way. With that said, AMD stock will rally today and our put-sell position will crater in price. Sure, we could've held out through the earnings announcement and looked like geniuses this morning, but based on AMD's last quarter bomb, and Nvidia's warning the other day, it just made sense to take profits yesterday. Let's go over the results. Here's what we did: Bought back (bought-to-close) all of the AMD February 15, 2019 $15 put options for an official buy price of $.17 per contract as a closing transaction (bought-to-close). Trades went across the tape between $.14 to $.20 per contract after the alert went out, with a majority hovering around $.17 per. If you decided to hold and not participate yesterday, the put option should only be worth a few pennies this morning, if that. You can opt to close it out today if you wish and book a bigger gain than the official mark. Or, you can continue to hold and wait to see if it will expire worthless. This will give you the full profit potential. Up to you. Officially, we closed it out yesterday. Here are the profit details: We originally established (sold-to-open) this put option on October 4, 2018 for a sale price of $.31 per contract, and now we took gains by buying it back (bought-to-close) for $.17 per contract. With the fill at $.17, it locked in a gain of $.14 per contract ($14 for every contract traded) and a return on margin (ROM) of roughly 4.7% in just under four month's time. If you like to annualize, that's roughly a 14% 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 $1,500 = $300. 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 was $300 per each put option contract sold. Our profit on this trade turned out to be $14 per each put option contract sold. Hence, the return on margin (ROM) comes out to $14/$300 = 4.7%. Also, the fill at $.17 allowed us to capture 45% of the full profit potential ($.14 gain/$.31 full potential = 45%). 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 $.31 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. In this case, we opted to take less than 80% to lessen the exposure to an unexpected earnings dud from AMD. Anyway, we booked the win and now we move on. That's all for now. 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!