Weekly Mailbag: Great Options Questions

I won’t be giving you specific updates on our latest trades in these mailbags. I know you receive a lot of emails, so I’ll keep any trade-specific content to the weekly updates that I send on Wednesdays.

Every Friday, I’ll take this opportunity to address many of the great questions you’ve asked.

But before we dive into our weekly mailbag, I want to give a brief overview of 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.

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.

Now let’s jump into your questions for today…

From the Mailbag

Thomas Y. writes:

If we are selling put options on A. Schulman (Nasdaq: SHLM) at a limit price of $1.30, how are we collecting $175 per contract?

My response:

This is a great question. The limit price and the amount we collect will always be different in my dispatches — even if the price we collect is the same. That’s because the limit price is the minimum amount I want to collect, so I won’t accept anything less. The amount I list that we are collecting — $175 in this case — is based on the midpoint of the bid and ask prices at the time I wrote the alert. It takes several minutes for our team to set up and send alerts, so that alone can shift prices. But the main movement in prices comes once orders hit the market — then the market makers will adjust, and that can lower the price toward our limit price.

Skye S. writes:

I got into the Charles Schwab (NYSE: SCHW) option a little late, and it is still open at $1.10 as of April 25. Should I modify or cancel it at this point?

My response:

This is a good point. We officially entered the June 2017 $37 put option on Charles Schwab the day it was recommended. But if you were a little late to that and now have an open order to enter it, I recommend leaving it open for a few more weeks. The worst that can happen is the stock pulls back to our strike price, and your orders get filled. The scenario is the exact same as if you’d entered in the beginning at that point. However, just keep in mind this is an open order, and if your capital is stretched, then you should go ahead and close it out.

John K. writes:

I’m enjoying and learning a lot following your trades! I tried to buy to open Brinker International (NYSE: EAT), but since I’m still a level one options account, I can’t. I will work on that! Should I just sell my 100 shares and take the $50 profit since it’s above our original $45 strike? 

My response:

Thanks for the email, John. Buying options should be a lower-level requirement than selling them, so if you sold to open an option on Brinker International, you should be able to buy the put option as well. You might need to check with your broker to see why. As for how you wish to manage the trade — if you are still up on the position and were not able to sell the covered call, either, closing it out today for a profit would make sense. I’ll have plenty of trades for us to move this capital into.

Onsy S. writes:

I joined Pure Income recently. I have couple of questions.

  1. Do I need to be at a certain level with OptionsXpress to have a margin account?
  2. Do I need to be at a certain level with OptionsXpress to enter the option symbol (for example, SHLM170721P00030000)?

My response:

Yes, you will need a certain level. I looked on OptionsXpress’ website here. It says you would need level two to write covered put options. That’s what we do by selling to open a put option — but this is for a cash-covered position. To use margin as you mentioned above, you will need level four. Level two would allow you to place all the trades that I will recommend.

That’s all for this week.

Thanks for the continued feedback and comments you send in. Please keep them coming so that we can keep this weekly conversation robust and rewarding for everyone. You can reach me at pureincome@banyanhill.com.

Regards,

Chad Shoop, CMT
Editor, Pure Income