Friday Q&A

Friday Q&A Hello Smart Option Sellers! The Friday Q&A hasn't made many appearances lately. If you have any questions, please don't hesitate to send them in. Let's go over what we got. Q: Re: BIG Lee - making the best of a maybe a 'poor' decision!?! I'm not sure... On 8-31-18, I sold (10) Jan. 2019 32.50 BIG Puts at $0.35. On 12-10-18, I rolled that position (10 Contracts) to July 30.00 for a Net Credit of $0.264. On 5-20-19, you closed out on this trade and I hung on. OK - my Net Credit to Date $0.614. [+$614.00] On 7-11-19, I'm assigned 900 shares of BIG at $30. Leaving just (1) BIG 30 Put expiring July 19th. On 7-12-19, I sold (9) Oct. 18th 30 BIG Calls at $0.60. My question to you is: am I using the proper method or approach to the mechanics of trading Options here? Does this progression of events make proper trading sense? A: Since you were assigned on 9 out of the 10 put options before the actual expiration, selling covered calls was a smart move. We will do the same when/if we are ever assigned on any of our positions. Since BIG stock is currently trading near $26.50, you are not that much underwater overall, and those covered call options you sold will bring in extra cash, so that's more money in the bank for you. After expiration today, you will get assigned on your tenth contract and will be long another 100 shares on Monday at $30 per share. This will allow you to sell another covered call option to bring in even more cash to your account. As long as you are comfortable holding the long shares, you can continue to roll the covered calls if the stock price stays below $30 at October expiration. If BIG closes above $30, you will relinquish the shares. If that happens, you should walk away a very happy camper because not only will you break even on the stock price ($30), but you'll have all the income from selling the puts and selling the covered calls. If BIG continues to meander, or move lower than $30, you will need to make a decision to either hold the shares, continue to sell covered calls, or jettison the position completely. Your choice. Q: Lee, can you tell me how "selling covered calls" works. I don't understand the process. I'd like to do it if I can. Thank you. A: Funny how the two questions we have today are on the same topic. Selling covered calls is a great income generator, but it only works if you currently have at least 100 shares of a stock in your portfolio. Since each option contract consists of 100 shares, you need at least 100 shares in your account to do it properly. The process of selling covered calls is quite simple: You're bringing in upfront income by selling the call options. In exchange for that income, you're agreeing to relinquish (sell) your shares to call option buyer if the stock price moves above the strike price by expiration. If the stock doesn't move above the strike price by expiration, then call option expires worthless and you get to keep the upfront payment and your shares remain intact. You are now free to sell another round of covered calls to repeat the process. It's very similar to what we do at Smart Option Seller with selling put options. There's a little nuance involved with picking the proper strikes though when selling covered calls. If you really want to keep your stock shares, it's best to sell strike prices that are out-of-the-money (OTM) and far above the current stock price. This allows for cushion and breathing room, and the probability will be low that the stock will breach the strike price. For instance, if your stock is at $100 per share, and you want to sell covered calls, but really don't want to lose the stock, then you can choose a strike that's far OTM, and at a price that you'd be ok with relinquishing if it came down to it. Maybe choose the $130 or $140 call options with six-to-twelve months expiration. This way, if the stock does hit $140, you'll at least get the extra $40 of appreciation from its current price of $100. Take a look at an option chain and compare the payouts for different strike prices and different expiration months. You can also cover half of your position if you want. If you have 1,000 shares of stock, maybe only sell five call contracts. Play around and find your comfort zone. Hope that helps. Well, that's all for today. Told you it was a small Q&A. Continue to hold all other open positions as-is. Contact us here with fills, comments, questions or concerns. Have a great weekend! Regards,