Exit Strategy, Limit Prices and Our Fluor Protective Put
Welcome to your Friday mailbag. Today, I’m discussing how to exit a put option we sold to open, how I determine limit prices and our Fluor (NYSE: FLR)protective put option.
As always, before I get to the questions, I like to use this weekly email to give a brief review of all the information that is readily available on our website — especially for our newcomers.
We have all our weekly updates, trade alerts and mailbag issues posted to the website in the archives section. It’s a convenient way for you to access and read these on your own time or to look back at past updates. Click here to view them now.
We also have a video library designed to help you learn more about options with our Intro to Options and Income Accelerator videos. There you can find a tutorial on put selling, a tutorial on placing a covered call, a webinar where I answer a few frequent questions and a welcome video. This content can help you get on the right track if you’re new to the Pure Income strategy.
We have also added our Getting Started series to the website. This is the first content you should have received after you signed up for Pure Income, and it offers a great primer on our service and the strategy.
Did you know we can send a brief text message to your cellphone anytime I send a Pure Income trade alert? Just click here to sign up.
And you can always view our open and closed positions online through our ePortfolio.
That’s a wealth of resources right at your fingertips, and I’ll continue to build out this content as I take your feedback and put it to work.
With that said, let’s jump into your questions for today…
From the Mailbag
Bill D. writes:
I’m a little confused about exiting a put and want to make sure I don’t mess up.
First, I traded the right stock option but the wrong date, and I ended up selling the Trinity (NYSE: TRN) October 20, 2017 $26 put at $0.92. It’s currently trading at $0.025. I’d like to know what my exit strategy should be.
Thanks for the email, Bill. The October 20, 2017 put option is actually the same expiration I used — so you did everything correctly.
Now, there are two ways to exit. One is to let it expire on October 20. If the price of the stock is above our strike price, then it expires worthless. The trade simply disappears and leaves you with the money you intended to collect. If the stock is below our strike price, then you’ll still keep the income you intended to collect, but now you get to own shares of the stock, too. That’s one way to exit a put option you sold to open.
The other way is to pay to close it out. If you do that, it’s based on the current price of the option. In this case, that’s just $0.025. So you could pay $0.025 per share to close it out, but this is a trade in your account, so you’ll have to pay whatever your broker charges to place a trade. If it expires worthless, which is the likely case, you don’t have to pay any trading fees.
Paul P. writes:
How do you determine what the limit price should be for a put option action order, since it will change from day to day and is affected to some degree by the price change of the underlying stock?
I understand why initiating the put option at a higher limit price than your stated limit price is beneficial, but I would like to understand how you determine where to put your stake in the dirt.
Thanks for the email, Paul. I use 3% of the strike price to set my limit price. That’s my goal with every trade. Sometimes it’ll be just below that, as it was with the Nike (NYSE: NKE) trade. But almost every time, it will be 3% or more of the strike price.
Bernardino U. writes:
I have a concern regarding our Fluor put option.
On August 30, we received an alert from you regarding Fluor. I bought two contracts. Do we still have this position or not? Since September 6, [there’s been] no more news about it. Verifying your portfolio, also no comments. Is it possible I didn’t receive an email with the updated status? Are you still recommending this position, or not anymore?
Yes, we’re still going to hang on to that protective put option. You haven’t missed any updates. The protective put option is there for protection to the downside, and even though the stock has bounced higher, I still want to hold that protection since it lasts through January — giving us four months of insurance.
Ideally, the stock will keep climbing, and our insurance won’t be necessary. That’s what we want. But in the event the stock falters on an earnings or guidance announcement, I don’t mind having the protection in place.
That’s all for this week.
Thanks for all the questions and feedback you’ve sent in. You can reach me anytime at email@example.com.
Chad Shoop, CMT
Editor, Pure Income