Profit Results - BMY

Profit Results - Bristol Myers (BMY) Hello Smart Option Sellers! Although the market is closed today for Good Friday, let's finish off the week by going over the results of yesterday's BMY buy-back trade. I had mentioned the fact that the healthcare industry was taking a beating the last few days due to UNH's earnings results and the forward progress of the "Medicare for all" insurance plans being touted by certain Democratic presidential nominees. Whether those ideas become law some day, it certainly won't happen within the next few months while our positions are open. So I feel confident that we can ride this temporary blip lower without any damage. It's also a reason why we took a new put-sell position on Merck (MRK). At the same time, I felt it was prudent to take some money off the table with our BMY put-sell position since a good amount of the profit had already been built up. So, here's what we did: Bought back (bought-to-close) all of the BMY June 21, 2019 $36 put options for an official buy price of $0.08 per contract as a closing transaction (bought-to-close). Most of the fills went across the tape between $.07 and $.09 per contract, with a majority being at $.08 per. If you didn't place the trade yesterday, you can certainly do so on Monday (if you wish). You are more than welcome to continue to hold if you feel like squeezing out a few more dollars of profit. Here are the profit details: We originally established (sold-to-open) this put option on January 25, 2019 for a sale price of $.26 per contract, and now we took gains by buying it back (bought-to-close) for $.08 per contract. With the fill at $.08, it locked in a gain of $.18 per contract ($18 for every contract traded) and a return on margin (ROM) of roughly 2.5% in just 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 $3,600 = $720. 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 $720 per each put option contract sold. Our profit on this trade turned out to be $18 per each put option contract sold. Hence, the return on margin (ROM) comes out to $18/$720 = 2.5%. Also, the fill at $.08 allowed us to capture 69% of the full profit potential ($.18 gain/$.26 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 $.26 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". Obviously this BMY trade was a bit under that mark, but it was done out of caution. Locking in early wins is just smart money management and it allows us to free up cash to put towards new trades. Congratulations to those of you who participated. Alcoa (AA) AA stock finished the day yesterday at roughly $26.60 per share. That level was above the $25, $25.50 & $26 strike price levels, so if you had bought any of those put options for the April 18 expiration hedge trade, they are now expired. For those of you holding the April 26 expiration puts, those will still be in play until next Friday. As mentioned in yesterday's alert, AA has been kind of a dud for us as far as a put-sell play. If the stock doesn't work out in the first few months, even after a successful roll, it's time to then re-think the trade. We'll make a decision in the near future depending on how the stock performs. Stay tuned... Friday Q&A Q: Did buy to close KO at 0.05.

Very frequently my orders get partially filled until completed. Partials take place at 1,2 and 3 contracts.

It seems hardly worth an investor trading for 1 or 2 contracts. How prevalent is this?

A: Orders being filled in increments is very common. Sometimes you'll have an investor who only wants to trade 1 or 2 contracts, and if your order is for 10 contracts, you will be filled in piecemeal until someone else comes along and fills the rest. No biggie. Q: Hi Lee, As you recall, we rolled out on BIG a while ago. I think it has done very well since then. My account is showing that I am up about 87.04% on my position. I was wondering if you plan to update us on what we should do with this BIG rollout out position. I am thinking that it is time to take profit given the 80% rule. I may see about stretching it a bit. But I will see what you have to say first. A: First off, remember this is your money, and if you ever want to take action, you are more than welcome to do so. Lock it in if profits await. BIG stock has been performing nicely of late (currently near $39) and is well above our strike price of $30 at the moment. Our put-sell position is decaying as we speak (that's good!), so we'll try to milk it for a bit more. As I mentioned in a recent alert, and depending on whether you took any of the hedge trades last month, we are very close to seeing an overall gain between the roll trades. I will give an update on Monday when the market opens to how we can handle closing it out. Q: Lee, Re: MRK - Thanks for talking about executing trades below your recommended sell price of .25. I notice this happens quite often as it makes it difficult for the rest of us to execute the trade and get the full benefit of your service. The other issue I've noticed is when we buy the position back. Sometimes the option prices stay the same for a long time even though the stock price is moving up a lot, like EMR. The stock price was about 35% above the short strike but the option price didn't move for quite sometime. I don't know if it's because there are of bunch of GTC orders sitting there at .05 or some other reason? A: You've touched on two issues here which are very pertinent to our trading. 1. You've seen my ire at orders that are placed outside of my recommended levels. It can certainly tip the balance out of our favor into the favor of the market makers. We don't want that. We are an intelligent group. Let's not jeopardize that. 2. One of the reasons why I have us buy the put options back at the 80% threshold is because it's very hard to buy options en masse much below $.05 per contract. Most of our buy-backs are at that $.05 level, and that's because I know from experience that market-makers are not too thrilled to sell options much below that level unless it's a few days out from expiration. Even if the stock price moves up, the option price still has a hard time going down below $.05 per contract. I'd rather have us buy back the options at $.05 per contract with two or three months before expiration instead of waiting to buy it back at $.02 per contract if that meant waiting all the way for expiration to do it. It's not smart to wait that long just to catch an extra $.03 per contract. Make sense? Q: Hi Lee,

Incidentally, I set my limit order on MRK to $0.25 as recommended, but am curious how often in your experience orders might be filled at slightly higher prices on average (say $0.27-$.28)? Also, what percentage of capital available do you allocate to each position utilized with either credit spreads or naked short puts?

A: Most option prices will be filled at whatever limit price you set if someone is willing to buy it from you. Sometimes in very fast, erratic & less liquid stocks, you may find that you'll get filled at a higher price than what you set. Doesn't happen often, but it can happen. As far how much capital to use - that's up to you to decide. Knowing that there's a possibility that we may take ownership of the stock if we get assigned, you have to be able to cover the full cost of buying the shares. That amount of future capital to be potentially deployed should factor into your decision. 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,

Lee Let's Grab That Cash!