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Profit Results - K

Profit Results - Kellogg (K) Hello Smart Option Sellers! No problem getting filled yesterday on the Kellogg buy-back order. Fills went across the tape between $.03 to $.05 per contract with most trading at $.05 per. That'll be our official mark. Here's what we did: Bought back (bought-to-close) all of the K June 21, 2019 $42.50 put options for an official buy price of $0.05 per contract as a closing transaction (bought-to-close). If you did not place this order yesterday, you can still get filled now at $.05 per contract or cheaper. Congratulations everyone. Here are the profit details: We originally established (sold-to-open) this put option on January 25, 2019 for a sale price of $.25 per contract, and now we took gains by buying it back (bought-to-close) for $.05 per contract. With the fill at $.05, it locked in a gain of $.20 per contract ($20 for every contract traded) and a return on margin (ROM) of roughly 2.35% in under three month's time. If you like to annualize, that's roughly a 10% 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 $4,250 = $850. 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 $850 per each put option contract sold. Our profit on this trade turned out to be $20 per each put option contract sold. Hence, the return on margin (ROM) comes out to $20/$850 = 2.35%. Also, the fill at $.05 allowed us to capture 80% of the full profit potential ($.20 gain/$.25 full potential = 80%). 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 $.25 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 again. Q&A Only two questions of late, so if you have anything for me, send it in! Q: Re: BIG Lee, this put is quoted at around $0.60 this morning. Is that getting close to being a good point to close out the trade? I'm confused about the right calculations on this one. A: BIG stock is performing very well here. It's currently near $39 per share, up from $26 during the depths of the December 2018 melt-down. I wish we had just left this trade alone, even before we rolled the first time. Sometimes even market veterans like myself get tripped up on a trade like BIG. I had confidence in the stock, but when you see it get pummeled along with everything else, you can sometimes second guess your decisions. Anyway, with the stock strong and the put option price decaying, there's no reason to do anything with it at the moment. We will let it die for a bit longer. I will go over the official calculations when we close it out, but if you want to get a ballpark, all you need to do is figure out how much loss you took on the original January 2019 put-sell position and how much you're currently making on the July 2019 put-sell position. If you were only involved in those two trades, you should see an overall small profit at the moment. If you were involved with last month's hedge trades (call & put buys) when BIG announced earnings, you will see varying amounts of overall profits or losses at this time. Q: Hi Lee,

I seem to recall that we were to have 3 put option sells per month. Do you feel we are there?

A: Thanks for the question. As far as new trades, we aim for 1-3 per month. Of course this is all market dependent. As mentioned in recent alerts, with the incredible bounce from Dec. 26, it has been a straight line higher with barely a pullback. This makes finding quality new put-sells a challenge sometimes. But no worries, the trades will come. Let's be happy with our current wins, and wait for the right time to strike. Ok, that's all for now. Continue to hold all other open positions as-is. Contact me here with fills, comments, questions or concerns. Have a great weekend! Regards,

Lee Let's Grab That Cash!

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