Friday Update Hello Smart Option Sellers! Happy Friday! I'd like to welcome some of our newer members who have recently joined. We're happy to have you with our small family and are excited to help you profit from this great strategy, and to educate you along the way. Cheers! Well, yesterday turned out to be a pretty good day for the markets. As we discussed, the U.S. & China seemed to have reached a "Phase One" agreement, which should allow the next round of planned December 15 tariffs to be put on hold. We'll see if there's any more formal language that gets put out by then (this Sunday). For now, it seems full speed ahead for the markets. But don't get too complacent, because you never know what Trump might tweet. Colgate Palmolive (CL) The good news is that we've now been fully and officially filled on our CL buy-back order at $.05 per contract. Even though CL stock didn't participate in the rally yesterday, it didn't stop other market participants from wanting to trade with us. Here's what we did: Bought back (bought-to-close) all of the CL January 17, 2020 $55 strike put option contracts for an official buy price of $.05 per contract as a closing transaction (bought-to-close). Here are the profit details: We originally established (sold-to-open) this put option on September 9, 2019 for a sale price of $.25 per contract, and now we took gains by buying it back (bought-to-close) for $.05 per contract. With the fill at $.05, it locked in a gain of $.20 per contract ($20 for every contract traded) and a return-on-margin (ROM) of roughly 1.8% in three month's time. If you like to annualize, that's roughly a 7.2% 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 $5,500 = $1,100. 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 $1,100 per each put option contract sold. Our profit on this trade turned out to be $20 per each put option contract sold. Hence, the return on margin (ROM) comes out to $20/$1,100 = 1.8%. Also, the fill at $.05 allowed us to capture 80% of the full profit potential ($.20 gain/$.25 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 $.25 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. If you did not place your order yet, you can still do so today. Do not pay more than $.05 per contract. Friday Q&A Let's hit a few questions. Q: Lee
The recent trade recommendation of Kellogg, I missed and many others it seems. Last I looked it was . sitting at a price of about $.20 or $.21.
You have always insisted that we remain firm on your recommended $.25. However if it looked strong when recommended it, why would it not be also strong at $.20? Is there a downside I am not seeing to purchasing at $.20?
I have always been firm but I have missed several due to not seeing your email in a timely fashion. However I could have purchased it at someplace between $.20 and .24. A: Hi, remember, we are selling, not purchasing. I understand that it's a common mistake, and I'm sure you knew that. Anyway, selling at $.25 is our limit, and we don't want to settle for less. Obviously you are free to do what you please, but we don't want to give in to the market-makers and get less than what we deserve. Yes, once the stock starts moving up, the put option price will decline, and you'll be kicking yourself for not selling for less than $.25 per contract. I still don't like doing that, so it might mean that you miss out on a few trades. But what happens if the stock declines after I issue a recommendation? The put option price will go up. If you sell too soon at $.25, you'll also be kicking yourself that you didn't wait to sell when the option popped up to $.30 per contract. It works both ways. Don't stress too much about it. It all equals out in the end. Make sure you receive the text alerts that a new trade is coming (if you haven't already). Q: Lee: FYI: On 11/26 I BTC 20 CL Jan 55P contracts for $ 0.05. I had an open order in my Vanguard brokerage account to do that. That is my usual procedure. Got $477.98 for the STO and paid $122.00 for the BTC so a net of $355.98. Comments? A: Yes, many of our members will keep a standing order to buy the position back at $.05 per contract well before I issue the official buy-back trade. If you've been with me for awhile, you know I'm not a big fan of placing the orders ahead of time like that. Why? Because it tips our hand and telegraphs to the market-makers what we intend to do. How? Because they can see all the standing orders - yours included. Whether you realize it or not, having a standing order can greatly delay our eventual timeline to buy back the position. How? Well, if the market-makers know we want to buy the position back at $.05 per contract, they will hold off for as long as possible on filling us. They will try to entice us to buy at their $.06 or $.07 offer if we get impatient. Also, if the stock starts to drop again, the put options can pop back up in price, causing an even longer delay in us getting filled at $.05 per. For me, I usually wait until I see a $.05 offer come into the market before I issue the official buy-back trade. This way, we can just scoop up the offers instead of having to place a $.05 bid and waiting for someone to hit it. Here's my suggestion if you still want to place the standing order - place a $.04 bid instead of a $.05 bid. This way, the market-makers can still come in and show a $.05 offer, and then I'll give the green light, and then we can all just buy it at $.05 per contract. Problem solved! Q: Of the many trading platforms available which platform do you recommend. TD, etrade or? A: The two biggies as far as sophistication are Interactive Brokers (IB) & TD Ameritrade. IB has their Trader Workstation (TWS) platform while TD has their ThinkorSwim (TOS) platform. Both are solid. I have no experience with E*Trade, so I can't comment. Charles Schwab has recently bought out TD and is waiting for approval. Once done, they will have the best of all worlds. Schwab also has its own software right now (Street Smart Edge) which is not bad. I would stick to one of those three for now. Oracle (ORCL) Lastly, ORCL released earnings after the bell yesterday and the market is hitting it a bit lower this morning. It's down roughly $1.50 per share to its current price of $55.00. We currently have a put-sell position on ORCL for the March 2020 $42.50 strike. I'm not worried about it at all. Great stock and we still have plenty of downside cushion. Keep holding. That's all for now. I'm headed out of town very soon so I'll catch up with everyone next week. 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!