Here's What We're Doing With BIG
Here's What We're Doing With Big Lots (BIG) Hello Smart Option Sellers! As mentioned yesterday, BIG will be reporting earnings results tomorrow (Friday) before the bell. That means if we want to make an adjustment, then it has to be done by end-of-trading today. But why make an adjustment at all? My goal at Smart Option Seller is to educate and make us money from the strategy of put-option selling. We can go long stretches of profitable trades until we get to a scenario such as BIG & AA that test our defense systems. One of the end goals of put-selling is to potentially take ownership of a stock at a very attractive price - if we still deem the stock attractive at all. If we are assigned and take ownership of the shares, we are able to ride the stock higher for large, long-term gains. But what if we get into a situation like BIG, where we are blindsided by a horrible earnings announcement like the one that occurred back in early December? The stock dropped almost $15 in the ensuing days, with much of that "gap" lower move happening in one day. It's sometimes hard to defend a position in that situation. But we did, and we rolled the trade successfully. Now, we find ourselves in possibly the same scenario - what if BIG drops a bomb again? Can we afford to take another hit? On the flipside, BIG stock did rally back about $6 after the initial bout of selling that occurred in December. Had we not rolled, we could've exited the trade back in January for a small gain. So, there's a chance the stock could rally after earnings tomorrow. But do we chance it? We're in one of those situations where it could turn out either way. And, the stock could move in the opposite direction a few days after the earnings are released. Investing isn't always easy. So, what are we going to do? My gut is wanting to hold, and hoping that BIG will release good numbers. But the past few quarters have not been the best, and analysts think the same could occur tomorrow. We could cut and run, and take the loss, which would eat into the profits of some of our earlier wins. On the other hand, we can take a more speculative adjustment and buy some cheaper near-term put options that would allow for larger gains if the stock makes a large move tomorrow. We could also buy some cheap call options as well, and if the stock rallies, at least we may be able to make some money off of that move. The draw-back? If the stock doesn't move much either way, it would be for naught and we'd lose the premium spent on buying the options. But based on the last few earnings announcements, I think the stock has the capacity to move at least $5 or more, which would give us an opportunity to make a profit from buying some options. So here's the plan, and I'll give a few choices. Note: you will only execute today's trade if you already hold the put-sell position in your account. If you don't have the position, you can disregard these instructions. 1. You can do nothing and just hold your position as-is. 2. You can completely close your current BIG put-sell position by buying it back during today. This will lock in the loss and end the trade. 3. Our official trade today will be the one I outline below: Here's what you can choose to do: Buy (buy-to-open) the BIG March 15, 2019 $30 put options for a limit buy price of $1.35 per contract or less, "day-only", as an opening transaction (buy-to-open). This is a trade that's only good for today. Use the "Day-Only" designation. Do not enter it as a "GTC" order. At the moment, this put option has a market of $1.00 bid/$1.20 offer, so we should be able to buy these for less than $1.35 each. Keep an eye on the stock price when you're about to enter your option buy order, as the option price will fluctuate a bit more. As the stock moves up, the option price will move lower, and vice versa. See if you can time your option buy while the stock is on a small upswing. The question arises - how many contracts should you buy? If you want to completely hedge your current July put-sell position, then you should buy as many contracts as you have sold of the July $30 puts. This is completely up to you though, and how much you want to spend. Also, in order to have a chance to profit if the stock makes a large move to the upside, you can choose to buy a call option as well. Here's what I recommend (this trade is not official). Buy (buy-to-open) the BIG March 15, 2019 $35 or $37.50 call options for a limit buy price of $.85 and $.45 per contract or less respectively, "day-only", as an opening transaction (buy-to-open). You choose which one you'd like to buy, and you can choose as many contracts as you see fit. This is an optional trade. And make sure to pay somewhere between the prevailing bid & ask quotes when you set the trade up. Ok? So, to sum up, we are officially going to buy the March 15, 2019 $30 put options, and buying the call options is optional. If BIG makes a large move tomorrow (mostly lower), the hedge trades today will work out well. If BIG goes nowhere, we will see some losses. That's all for now. I will give complete details of everything tomorrow, including any other adjustments that need to be made. 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!