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Friday Update

Friday Update Hello Smart Option Sellers! Happy Friday! I'm getting this alert out to everyone a bit earlier than usual. Obviously our biggest concern today is our expiring Gap, Inc. (GPS) $18 put option. The stock has dropped a bit since Wednesday's alert and is hovering near $17.50 per share. This gives the put option a value of roughly $.50 per contract. Every tick higher or lower of the stock today at this point will also move the option's price higher or lower in lockstep. If GPS moves up to $18 by the end of the day, the put option will have zero value. If the stock drops to $17, the put option value will move up to $1 per contract. As it looks increasingly certain that the stock will finish below $18 today, the chance of assignment is very strong. Meaning, we will end up buying the shares at $18 per, and you will see them in your accounts on Monday morning. At the same time, your account will be debited for the cost of buying the shares. I mentioned this in Wednesday's alert. Let's go over some possible scenarios today, so we're all on the same page. 1. If GPS finishes below $18, the shares will be assigned. That's a certainty. 2. If GPS finishes above $18, the options will expire worthless and there will be no obligation to buy the stock. That's a certainly. 3. If it looks as if GPS stock will finish below $18 by the end of the day and you have no desire to buy the shares, then you MUST buy the put options back by the end of the day at their going rate. Depending on where GPS stock is trading at the time you execute the buy-back, it will lock in either an overall small loss or gain. 4. Our official move is to take assignment of the shares if GPS remains below $18 at the end of the day, and we will institute a covered call strategy on Monday morning. I will give an update then on how the final profit/loss numbers look for this trade and the prior roll trade. A caveat to all this - if GPS stock rallies today and we're offered an opportunity to buy back the put options for $.10 per contract or less, we will do it. This is a move we probably should've taken last Friday, but I felt good about where GPS was trading at the time and didn't think it would drop back down. Lessons are always being learned, even for veteran traders such as myself. So, stay vigilant today, watch for text messages, and keep an eye on your inbox for any more alerts later today. Friday Q&A One question to answer today. Q: Lee, I understand that you cannot provide personal advice. But I did just realize something and wanted to ask you if my thinking and math are correct here. Normally, I sell 40 contracts of a recommended SOS Put, netting about $968 per trade ($.25 x 4000 minus commissions). And for Vertical Spread Trades, I normally sell 25 contracts, netting about $587 per trade ($.25 x 2500 minus commissions). But it just occurred to me that since the VS trades have a limited, defined loss, and since the SOS trades do not, I'm better off -- in terms of margin required and loss exposure -- to heavy up on the VS trades and lighten up on the SOS trades. (Yes, I understand what margin means in this instance!!) Is my thinking correct here - that in terms of Put-selling margin required and reduced loss exposure, VS trades provide less of both?? A: Great questions! You are correct in your assumptions - executing any kind of options spread will always offer a defined, limited-risk scenario. Vertical Spread Trader offers that exact scenario of limited risk. At the same time though, there is less down-side cushion with put option spread trading as compared to Smart Option Seller's downside cushion. So now you are confronted with a decision of win rates versus cushion versus risk. With Smart Option Seller, you have more cushion, higher win rates, but yet more potential downside risk. With Vertical Spread Trader, you have less cushion, lower win rates, but less risk, all compared to Smart Option Seller. It's up to you to decide how to balance out those three factors. If you're basing the decision purely on risk assessment, then clearly Vertical Spread Trader is the less risky choice. But know, if we take assignment of stocks in Smart Option Seller, we now gain the opportunity for unlimited upside gains - something that Vertical Spread Trader doesn't necessarily offer. As far as the margin requirement - much of that is dependent on the strike price itself. For instance, if we sell a $25 put strike in Smart Option Seller, the typical 20% margin requirement would be $500 - this is the same as the typical Vertical Spread Trader margin (and risk) per trade. In that case, the margin is the same. But if we use a $50 strike in Smart Option Seller, now the margin requirement would be $1,000 - double that of a typical Vertical Spread Trader margin requirement. Tough choices, eh? Option trading is truly multi-dimensional in the decisions that need to be made, compared to stock trading. In the end, it's your call as to how to handle, but my goal is to give you the information so you can make the decision. Hope that helps. That's all for now. Keep a watch for any other alerts from me later today. 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!

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