Friday Q&A

Friday Q&A Hello Smart Option Sellers! Let's get to the questions. Q: KHC could be an interesting play. A: For those of you not aware, Kraft Heinz (KHC) has taken a nasty tumble today to the tune of $13.50 per share. That's a drop of 28%. Ouch! I've had KHC on my radar ever since its spin-off back in the fall of 2015. It rallied a bit right off the bat, but has been steadily falling since February 2017. I never felt right about pulling the trigger on a put-sell. Glad we didn't. Even though it's one of Warren Buffett's biggest holdings, I still couldn't do it. Here's the current chart. How about Stamps.com? D'oh! No thank you! Here's the current chart. Anyway, I would give KHC a closer look once more strike prices have been added. At the moment, the $30 strike is the lowest listed. Too close to the stock price for my liking. If the $20 or $25 strikes were listed, then maybe I'd consider. We'll pass for now. Q: Hi Lee, Can you please tell me the correct way to calculate the ROI for the naked puts we sell. I have read several different articles and they are somewhat different, ie some annualize on a yearly basis for returns on put contracts. I think the amount of time we hold onto the contract before we close is also factored in. Please advise the "best" and most realistic way to calculate the trade. A: There's only one way we calculate the return-on-margin (ROM), (not ROI). We use the initial margin requirement as our base, and then calculate the eventual ROM once we close out the trade. For instance, our INTC trade that we closed out today was for the $32 strike price. We use 20% of the strike price as our margin requirement. That is calculated as follows: if we had to buy the 100 shares at $32 per, it would cost $3,200. 20% of $3,200 = $640. So in order to sell one put option, it would require a $640 margin requirement. Since we locked in $20 of profit on the trade (I'll have all these details on Monday), the ROM is $20/$640 = 3.125% in just under one month's time. If you annualize that, it comes out to roughly 37.5%. All makes sense? Please read the "Margin Primer" that's in the Members-Only section of the website for more details. Q: Hey Lee, Since we rolled over Alcoa for about $3.00, I’m assuming we won’t wait until it’s $0.05 to buy it back? At what price point will we decide to lock in profits? And in calculating the profit, we have to also consider how much we bought back the old Alcoa options for, right? A: We took a loss on the original AA put-sell trade of $2.12 per contract. We then sold the new AA put-sell for $2.90 per contract. In order to just break even between the two trades, the new AA put option needs to drop in price to $.78 per contract. It's currently worth roughly $1.25 per contract. If we closed it out today, we'd take an overall loss of roughly $.66 between the two trades. Not bad, considering how low AA stock had dropped. Anyway, we're holding for now and will look to close it out in the future (for a profit!). That's all for today. Continue to hold all other open positions as-is. Contact me here with fills, comments, questions or concerns. Have a great weekend! Regards,