New Trade! And Profit Results - VZ
New Trade! Hello Smart Option Sellers! Hope everyone had a great weekend. Let's jump into a new trade today. Colgate Palmolive (CL) A newcomer to the Smart Option Seller wish list - we've yet to play this household name, but let's see if we can get it done today. CL stock is currently near $73.30 per share, and we're aiming for a strike price just above our $50 threshold. Here's the current chart. If filled, it will give us an $18.30 downside cushion, which equates to a 25% buffer. Here's what you can choose to do: Sell (sell-to-open) the CL January 17, 2020 $55 put options for a limit sell price of $.25 per contract or higher, GTC, as an opening transaction (sell-to-open). Currently, this put option has a market of $.20 bid/$.35 offer, so let's see if we can get these done. Remember, try to place your offer price somewhere in the middle of the bid/ask spread to start. Don't jam the offer price immediately at $.25 per contract. Be cool about it. Maybe start at $.30 offer price and then incrementally move it down a penny at a time if you have the time and means. In the end, do not sell for anything less than $.25 per contract. Profit Results - Verizon (VZ) We had no problem getting filled on Friday's buy-back trade on VZ. Trades went across the tape at our target price of $.05 per contract, so we'll mark it as the official price. Here's what we did: Bought back (bought-to-close) all of the VZ October 18, 2019 $45 put options for an official buy price of $.05 per contract as a closing transaction (bought-to-close). If you didn't place your order on Friday, you can still do so today and get filled at even cheaper prices. I'm seeing this option contract hovering around $.04 per contract. Let's go over the profit details: We originally established (sold-to-open) this put option on May 1, 2019 for a sale price of $0.28 per contract, and now we took gains by buying it back (bought-to-close) for $0.05 per contract. With the fill at $0.05, it locked in a gain of $0.23 per contract ($23 for every contract traded) and a return on margin (ROM) of roughly 2.6% in four 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 $4,500 = $900. 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 $900 per each put option contract sold. Our profit on this trade turned out to be $23 per each put option contract sold. Hence, the return on margin (ROM) comes out to $23/$900 = 2.6%. Also, the fill at $0.05 allowed us to capture 82% of the full profit potential ($0.23 gain/$0.28 full potential = 82%). 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 $0.28 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 to those of you who participated. That's all for now. Continue to hold all other open positions as-is. Contact us here with fills, comments, questions or concerns. Regards,
Lee Let's Grab That Cash!