CSCO Update... And What's Up With GPS?
Cisco (CSCO) Update Hello Smart Option Sellers! Yesterday we placed a new put-sell order on CSCO. Unfortunately, we just couldn't get filled. The option price hung at $.24 bid/$.25 offer for a good part of the day, but the players just wouldn't bite. Since we have five months on this trade (Jan. '20 expiration), let's give it a little time to breathe and see what happens. One more big dip in the stock price and I'm sure we'll get filled. I'm not interested in moving up to the next strike price, which happens to be the $32 strike. That's $2 higher. If the $31 strike was available, maybe I'd consider it. But definitely not interested in selling the $32 puts. You can certainly decide that on your own though, as some of you have written in and asked me. Up to you. Sometimes we need patience with options trades. Keep working it "GTC" for now. The order is below for reference: Sell (sell-to-open) the CSCO January 17, 2020 $30 put options for a limit sell price of $.25 per contract or higher, GTC, as an opening transaction (sell-to-open).
What's Up With Gap, Inc (GPS)? Yes, the question on everyone's mind. We currently hold a put-sell position on GPS that had been rolled from a prior position. The stock had been holding steady near our strike price of $18 for two months and it looked as though it found a base there. Until yesterday. That's when the bottom seemed to have fallen out, as it now trades near $16 per share, putting it $2 below the strike price. It had gotten down to $15.20 yesterday before the slight rebound today. What happened? Well, for starters, Macy's (M) released earnings the other day and the stock got trounced. Apparently, any other mall retail clothing company like Gap, American Eagle (AEO), Abercrombie & Fitch (ANF), and even JC Penney (JCP) are all being lumped together and sold concurrently. Seems the competition with Amazon might be sounding the final death knell. But is it? GPS releases earnings next week after the market closes on Thursday 8/22. This will be the make-or-break day for us. If earnings are solid with potential good forward guidance, the stock will shoot back up towards $18. If earnings are a dud and forward guidance is weak, the stock will drop. Probably hard. So what's the plan? We will always have a 30% stop-loss level below the strike price activated on any trade while it's open. If you calculate that from our original $20 strike price before we rolled to the $18 strike, that would put the stop-loss at $14. If you calculate it from the $18 strike, the 30% stop-loss puts it near $12.60 per share. We're not near either one of those levels at the moment. This is all assuming we don't roll again first. But at this point, I'm not too interested in rolling again as we'd have to go pretty far out on the expiration curve to make a difference. What we will most likely do next week on Wednesday is to buy a hedge trade on a cheap put option for next Friday's expiration, so if earnings are bad, we will be protected from an all-out rout. So for now, continue to hold as-is. But let's talk about this position for a minute in the context of put-selling. One of the features of a put-sell trade is not just the fact that you get to collect upfront income, but it's also an opportunity to scale into a long stock position at a price cheaper than where it had been in the past (assuming you want to buy the stock). If assignment comes to fruition (that's when you actually get to buy the stock), and the stock moves higher, then you have unlimited upside potential now. Plus, you can collect any dividends that the company pays. So buying a stock through the put-selling process can be a very lucrative endeavor. We just haven't done it yet in Smart Option Seller (nor back in the Instant Money Trader days). So if you're selling put options with us, or on your own, you always need to consider if you're still willing to buy the stock as it falls in price. Will you change your mind? Will you get scared and trade out of the position? With 100 years of market history on our side, most of the time stocks will end up going higher. But not every individual stock will follow this pattern. Some stocks fall out of favor (GE, JCP) and some stocks become obsolete. The question for us is - does GPS deserve a spot in our portfolio even if it's been falling? Next week I believe will give us the answer. We've played GPS successfully six times since our inception, and now we hold a potential seventh. Smart Option Seller's intention is to mostly make money through the buying and selling of put options, with taking ownership of the stock a secondary concern. Would owning shares of GPS be a bad thing? That depends on your outlook for the stock moving forward and whether you think it's a dinosaur in the age of Amazon. Sure it's underwater at the moment. But who hasn't had stock holdings that drop? We've all been there. If the stock is solid, it'll bounce. Let's see what next week brings for GPS and make the call next Tuesday or Wednesday. If you are adamant about not wanting to be in the trade anymore, you are always free to get out of it. All that's needed is to buy the put option back. It will lock in a loss, but the trade will be closed and not weighing on your mind anymore. It's your money and your account. You can do what works best for you. I don't hold the keys. For now, we are officially holding until next week. Friday Q&A Only one question to answer this week. Q: RE: Early removal of option due to assignment. Long time subscriber. Been doing very well with the service - and over the years I do venture on my own, and 99.9% do well using the techniques of your smart strategies and common sense. However, for reasons I do not understand, every now and then (only happened about 3 times in 5 years) a Put Sell trade gets removed and assigned prior to contract date. In every instance, the stock price was below the Strike price, hence the new stock is already under water. Also, in each instance this has happened it is about 2 months prior to expiration. My questions are: 1) why does this happen? 2) anything I can do to avoid it? Most recent example: GT Oct 18 $15 Put. A: Thanks for the question. This scenario fits right in with my talk above about the concepts of put-selling. Was GT a stock you genuinely wanted to buy at $15 per share? Or was it only a stock you wanted to buy at $15 when it was still trading at $20 a few months prior? I don't know when you placed this trade, but it always seems like a very small probability that it could drop that far. But then when it does, and it drops below the strike price, you start second guessing yourself on whether you still want to own this company. Sound about right? GT has fallen from $20 to $11 in a very short period of time. That's almost 50% of its value wiped away. Honestly, I'm not sure why GT has fallen so much and it's been on my radar as a potential trade for Smart Option Seller. But back to your questions. A majority of the time (99.9%), option buyers will not exercise the option early before expiration. Yours was in that .1% category. Why would they do this? Lack of knowledge probably. As long as the stock keeps dropping, the put option will increase in value. No need for them to exercise it early. Anyway, now they hold short shares in GT while you hold long shares. If the price moves up, you win and they lose. Are you going to hold? Do you still like GT for the long run? As far as how to avoid this happening again? Here's a pro tip: Always check the price of the corresponding call option to your put-sell. In this case, the October $15 call options. If the price of the call option is $.05 per contract or cheaper, then you are at high risk of being assigned early before expiration. Why? Because the put option has basically reached full value (intrinsic value) and it's not worth holding anymore due to the "cost of carry". Cost of carry is the inherent loss of income due to missing out on any interest paid on your free cash. If the put option buyer keeps holding the put option even when it's reached full value, he's missing out on putting that money into other trades, or just earning interest on it in the bank. By exercising the put option when it's reached full value, it will be turned into short shares of stock and although he'll now have a margin requirement at that time, he'll still be freeing up a good portion of the cash that was being used to hold the put option. I know I'm getting a bit technical here, but use the tip about watching the price of the corresponding call option to give an advanced warning that you may be assigned early. If that's the case, you can either get out of the trade or roll it forward. Hope that helps. Well, that's all for today. Continue to hold all other open positions as-is. Contact us here with fills, comments, questions or concerns. Have a great weekend! Regards,
Lee Let's Grab That Cash!