March 31, 2020

The market continues its bounce off the lows from last week.

Is this the bottom?

I’m inclined to say no at this point, only because the coronavirus numbers are still rising, unemployment is going to skyrocket, and earnings reports will be coming out in a few weeks.

Those three items will most likely cause the market to drop a bit more. We might not retest the low from last week, but I think we’ll see a pullback soon.

In any case, we’re going to resubmit the Kellogg (K) roll trade from last week that we didn’t get filled on.

Remember, we had placed it as a “day-only” order, so your orders should have cancelled out.

If you left it open and have been filled at even-money, they you might have received a fill this morning.

With K stock moving higher today, there’s a chance fills can be received at better than even-money.

Below are the instructions.

Kellogg (NYSE: K)

Here’s what you can choose to do:

Note: You will only execute this roll trade if you already hold the put-sell position in your account. If you don’t have the position, you can disregard these instructions.

Buy back (buy-to-close) all of the K June 19, 2020, $52.50 put options as a closing transaction (buy-to-close), “GTC.”

And then…

Sell (sell-to-open) the K September 18, 2020, $47.50 put options as an opening transaction (sell-to-open), “GTC.”

Currently, the spread at a minimum is worth even-money, but can probably be done for a credit now — that’s better!

Please try to get the best fill possible, and leave it “GTC.”

Remember:

We want to buy-back (buy-to-close) the K June 19, 2020, $52.50 put options and sell (sell-to-open) the September 18, 2020 $47.50 put options, “GTC.”

That’s all for now. Let us know if you get filled and continue to hold all other positions as-is.

Contact us at instantincome@dentresearch.com with fills, comments, questions, or concerns.

Regards,
Lee Lowell
Executive Editor, Instant Income Alert

March 25, 2020

The U.S. markets had the best one-day gain ever recorded during yesterday’s session with the Dow Industrials up over 2,200 points. That’s a serious move.

Congress has agreed in principle to a $2 trillion spending package to help alleviate the effects of the coronavirus on the U.S. economy. It’s being put to vote later today.

This was a big part of yesterday’s up-move, as it helped to alleviate some of the fear.

The problem is, it still doesn’t help us figure out when the virus will stop spreading and how much actual damage it will inflict once it passes. There’s still too much uncertainty.

I’d like to say that we’ve hit the bottom in the stock market, but I just don’t think we’re there yet. I can see another round of selling happening.

We also have to watch the next round of earnings reports, which should start trickling out over the next few weeks. This will include partial data of the virus effects. If companies report really horrible results, it may lead to more selling.

My personal goal, and I think maybe you might be doing this as well, is to key in on a handful of stocks that are on your radar for possible purchase at these very low levels.

I’ve been nibbling a bit here and there, nothing major yet, but I at least want to get a foot in the door. If you have some dry powder (free cash reserves), it may be worth looking at nibbling too.

But for today, we’re going to roll one of our put-sell positions as the rally is helpful to that cause.

Kellogg (NYSE: K)

Here’s what you can choose to do:

Note: You will only execute this roll trade if you already hold the put-sell position in your account. If you don’t have the position, you can disregard these instructions.

Buy back (buy-to-close) all of the K June 19, 2020, $52.50 put options as a closing transaction (buy-to-close), “day-only.“

And at the same time…

Sell (sell-to-open) the K September 18, 2020, $47.50 put options as an opening transaction (sell-to-open), “day-only”.

You’ll notice that I didn’t put any prices on each option trade. Here’s why:

Currently, both the June and September put options are worth about $3.70 per contract.

We want to try to do the roll for even money, which means we want to buy the June contract back and sell the September contract for the same amount of money.

This will allow us to keep the original $0.25 credit we received when selling the June position, while at the same time lowering our risk in the trade by $5 per share.

Here’s how you will execute this two-part transaction:

You can execute both trades in one single transaction called a “diagonal options spread.” All broker platforms have this capability. If you don’t know how to do it, please reach out to them.

This way, you can specify a total debit, credit, or even-money between the two trades instead of having to manually execute two separate trades. In this particular trade, you will specify “even-money”.

Doing the spread trade is the easiest, but I also understand not everyone is knowledgeable, or even comfortable doing it.

If you cannot (or don’t want to) execute the spread trade, you can certainly execute two separate transactions by buying back the June contract in one of the transactions and then selling the September contract in another secondary transaction. This way takes more finesse, so you have to pay more attention to each side of the trade.

So, let’s make sure we’re all on the same page so there’s no confusion.

We want to buy-back (buy-to-close) the K June 19, 2020, $52.50 put options and sell (sell-to-open) the September 18, 2020 $47.50 put options, “day-only.“

As mentioned above, both options are currently worth around $3.70 per contract.

Make sure to check the option prices on both positions before placing your order so you know what look for.

If you are going to manually execute two separate trades (because you can’t figure out how to do it as a spread), then you still need to make sure to try to sell the September put option for as close to the price that you’ll pay to buy back the June put option.

If we are not filled today, I will send an update tomorrow with new instructions. Remember, this is a “day-only” order.

Ok, that’s all for now. Get those K roll orders in there and let us know how you do

Contact us at instantincome@dentresearch.com with fills, comments, questions, or concerns.

Regards,
Lee Lowell
Executive Editor, Instant Income Alert

March 9, 2020

Obviously the weekend didn’t heed our request to bring good news.

It will be another ugly day today.

The futures markets have been locked at “limit down” since opening last night at 6 P.M. ET.

“Limit down” means the market has fallen as much as it’s allowed to fall based on the parameters that the exchanges have set. In this case, that’s a 5% move from the previous session’s close.

Once the “regular” session opens up, then the limit will be lifted and new parameters are set for intraday trading.

All markets will be deep in the red to start the day, and it’s anyone’s guess where it goes from there.

Typically, when the market opens at levels like this, we see a wave of buying emerge to take advantage of the cheaper prices. I’m hoping that will happen again.

One of the other catalysts for today’s big drop — besides the coronavirus — was the failure of the OPEC countries to agree on new quota levels during their weekend meeting.

Russia basically rejected all levels, and so now the spigots are free to flow. Saudi Arabia will increase output and has already offered oil contracts to customers at levels $7 lower than previous terms.

This immediately dropped the price of crude oil $10 per barrel in the overnight session.

To put that into perspective: when I was a floor trader engaging in oil futures and options contracts, $0.50 per barrel was considered a big move. Today’s drop is 20-times greater than that. This is very big deal, and it will affect the stock market in a negative way.

We will most likely take action today on some or all of our positions in the form of another round of roll trades.

It will make sense to lower our potential buy-in levels when the market acts like this. Although we will be extending the trades, it gives us more cushion and conservative levels to play with.

So, look for another alert from me a bit later after the market settles in. On a day like today, that could be 30-45 minutes after the open.

I’ll be in touch soon.

Contact us at instantincome@dentresearch.com with fills, comments, questions, or concerns.

Regards,
Lee Lowell
Executive Editor, Instant Income Alert

March 9, 2020

After the historic open this morning to the downside, the markets have found a bit of footing and have rallied off the lows.

We’re nowhere near out of the woods yet, and there’s still a ton of red today, but it’s good that a bounce has occurred.

Many of our positions still have downside cushion between their stock price and their strike price. This is comforting.

But once again, just because we have cushion doesn’t mean the put option prices will stay down.

They have been rising, which puts us underwater on the trades.

Only some of our positions are either right at the strike price or slightly below.

I’d say that’s pretty amazing, considering the scope of this down-move.

The question still arises though: what’s our plan?

Rolling some of these trades today would be a very hard thing to do only because the option bid/ask spreads are very wide.

If we tried to make the trades today, I feel that we wouldn’t get the best fills.

I’d rather wait until at least tomorrow or Wednesday to give the market a chance to calm down and re-assess what’s happening. This will allow the option prices to smooth out a touch and offer better opportunities.

Remember, our long-term goal is to build a portfolio of quality stocks.

I understand it’s hard to see that right now as everything is falling. Why would anyone want to invest in the market under these conditions?

That’s the exact question and mindset that left many investors out of the 11-year rally that ensued from this exact day 11 years ago on March 9, 2009, when the bottom was hit.

I’m not saying we’ve hit bottom, but if you want an opportunity at long-term growth, you’ll have to step in at some point. I know many, many investors who were kicking themselves all those years while the market rallied without them, me included for a time.

If we continue to hold our positions, we may get that opportunity if we’re assigned on some of them.

Please make sure if you are onboard with that plan — emotionally and financially.

As a put-seller, it’s easy to feel confident when stocks go up. You think, “There’s no way this stock is going to fall 30% in three months.”

Or, you might say, “Heck, if this stock falls 30%, I’d love to buy it there.”

Well, now that it’s there, are you still loving it? Are you still willing to buy it?

Because quite honestly, it could keep going lower.

That’s the risk anyone takes when buying stocks — whether it’s an outright purchase, or through a put-selling strategy.

The market will find its footing again. It always has, and always will.

We’re going to stick with the plan of either rolling or holding, whichever makes more sense.

Let’s re-group tomorrow and if the option bid/ask spreads are more attractive, we’ll look to roll a few positions.

Ok, that’s all for now.

Contact us at instantincome@dentresearch.com with fills, comments, questions, or concerns.

Regards,
Lee Lowell
Executive Editor, Instant Income Alert

March 6, 2020

As you all are probably aware, the coronavirus continues to be the catalyst for the market sell-off.

It is impacting just about every publicly-traded stock, including our put-sell positions.

Is the sell-off because every company will go out of business? Of course not. But, it is a reassessment and recalculation of what these stocks should be trading for, based on how next quarter’s earnings will come in.

How much of an effect the coronavirus have on the bottomline of each company, is the question. We don’t know yet because everything is so fluid.

Governments and communities around the world are trying to grapple with the best way to combat the virus. As of now, it’s still spreading and not slowing down.

The stock market will keep calibrating until its satisfied that all the news is baked in. Prices will most likely continue to fall in the near term.

Position Update

The instructions haven’t changed much since the last alert on Wednesday.

Every single one of our put-sell positions still has a cushion between the strike price and the stock price, although they have moved a touch closer this week.

One of the questions we face – do we just shut everything down and take the loss, or wait it out?

I don’t think shutting down is necessary.

Of course, you are free to make any decision regarding these positions as you like.

Remember, the goal here is to build a long-term portfolio of quality companies. If that’s the path we take, stepping in at some point will have to be done.

We can certainly roll again, and we may do so. This will lengthen most of the trades out to January 2021. but if that’s what it takes to lower our risk to a more conservative positions, then so be it.

We will remain on the sidelines for now, as it makes no sense to stick our necks out over the weekend, especially since we don’t know what kind of news will emerge.

So, sit tight for now, and let’s hope for good news.

Q&A

Q: Hi Lee-

I entered a few roll-out trades using spread trade and within amounts listed under bid/ask, but am not getting any traction? Do these trades need time to work, or should I try to do as separate trades (buy to close existing put and sell to open new one as separate trade)?

A: Hi, as mentioned in each alert, it’s usually best to enter the roll as a single spread order because if you try to leg it, the prices can move on you between the time you fill one of the legs while you get your order ready to trade the other leg.

Yes, sometimes the market can move that quickly even if it only takes a few seconds to get your trading platform set up to make two individual transactions

On the other hand, if you have the time and means to closely watch your positions, sometimes you can get lucky and do better by legging the trades. But that takes determination, concentration, and persistence. It could take lots of cancelling and replacing orders multiple times.

In the end, it makes more sense to use the single spread order. And if you have to change the price of it because the stock price is moving around, it’s very easy to do.

And yes, sometimes they take time to fill. Patience is necessary on occasion.

Q: So, really there are 2 options with such a deep decline: (1) Close positions (2) keep rolling your puts. Can you please comment in your newsletter how you would assess whether option 1 or 2 is better?

A: As mentioned in the commentary above and in previous alerts, rolling is our first course of defense, and we can continue to roll more than once. It will lengthen the trade but keep our risks even smaller.

Closing a position is a last resort, and that would happen if the stock completely moves 25%-30% below any adjusted strike price we roll to.

But even in that case, it might make the most sense to get assigned the shares and implement a covered call strategy at that point.

Once the chaos is contained and the market stabilizes, the stock market will take off like a rocket.

I believe we are entering a time of extreme opportunity, but since the coroanvirus is somewhat different, we need to be a bit more nimble.

So for now, we take each position at a time and use the roll trades as our defensive measures.

Q: I frequently hear about protecting downside risk for Naked Put Options sellers. How would one accomplish such a strategy in times of turmoil such as we just had. Would that be a Spread Trade against our Put Options. I’m not looking to place such trades each time I place one of the recommended trades, just looking to level out the risk as we start getting huge downside moves like last week.

I realize all Lee’s trades have lots of downside cushion and we can do roll trades to push risk further out but I’m curious if we can take short term action to mitigate downside risk. For example when we were up on Tuesday I sold calls on my $MSFT and $V positions which worked out very nicely, mitigating some risk. Is a spread trade a good strategy for extra protection in times of extreme turmoil?

Appreciate any thoughts or guidance on this topic….

A: Taking defensive measures on naked put-sell trades comes down to what your objective is.

If you are clearly looking to obtain the stock at the strike price through assignment, then there’s no need to sell calls or turn it into a spread.

If the put-sell is more of a speculative trade, then yes, maybe selling some calls or buying a very cheap lower-strike put option could help mitigate some of the loss.

As for us at Instant Income Alert, we take the approach to wanting the stock. We of course can roll the trade to lock in an even better potential buy price, but we won’t sell calls, and usually won’t buy other put options as a hedge.

I’m not sure if you sold calls against the put-sell positions or against actual stock on MSFT & V you own.

If you sell calls against put-sell positions – be very careful. That can entail unlimited risk.

Q: Hi Lee,

One guru I was reading online mentioned that the recent crash was due to Gamma Hedging, not the corona virus. Can you please explain in simple terms what gamma hedging is and how it would have impacted the market dip last week?

Also, someone mentioned that one correction such as last week often comes in pairs. Can you please explain why that would be the case? And the second dip is normally worst that the first one? Why?

A: Gamma hedging involves the actions of very active floor traders, typically not what we as retail traders have to be concerned with.

Now, when I was a floor trader, I absolutely had to gamma hedge but that was because I was carrying lots of positions and needed to adjust my risk all day long.

Gamma is one of the Greek by-products of the option pricing formula, and gamma hedging refers to the action of adjusting a large option position to keep your delta risk in check.

Delta is another Greek by-product (and most important in my opinion) and delta risk with an option position centers around the the bullishness or bearishness of all the option trades you hold at one time.

If you want to be directionally neutral, then you have to adjust your deltas to keep them flat.

Gamma will affect the rate at which the delta changes, so in order to keep the delta flat, there will be lots of buying and selling of the underlying stock.

Are you confused yet? Lol.

It’s very hard for me to believe that gamma hedging has been the source of the recent sell-off. I think as we all know, the coronavirus has been the catalyst. Gamma hedging may have agitated it a bit more, but certainly not the main culprit.

As far as the selling coming in pairs – I’m sure it was meant to describe the scenario where we’ll get a huge move to the downside and then a quick run back up. Then the second wave (pair) of selling occurs, which you mentioned can be more severe than the first.

Just look at a recent chart of one of the main stock indexes. We’re on that second wave now, and it might be deeper than last week’s before we see another snap-back rally.

Q: Lee-

Just to reiterate- if stock price goes below strike price any time before maturity date we can be assigned shares, but this is highly unlikely until date of maturity.

Am I correct?

A: Yes, that is correct.

Put yourself in the mindset of the put-option buyer.

If the stock is falling, then your put option is rising in value and giving a paper profit.

Would there be a reason to exercise the option just because it passed through the strike price? No, there wouldn’t.

If the stock keeps dropping, the put option will keep going up gaining value. It would make more sense for the put option buyer to just sell it at that point to lock in the profit.

But yes, it could be assigned at that point, but still highly unlikely.

Q: Lee,

I understand the market is up-side down and now going back up. I joined up with you in December, am a widow, want to learn but so hesitant to move forward that I have not ventured into even one trade. I have been trying TD Ameritrade’s trial ordering but still am not comfortable.

For example on the STO recommendation for 6-19-2020. Why would I risk $3,750 to earn $25? What am I missing?

Thank you.

A: Hi, good question, and a valid one.

But to understand the answer, your mindset needs to be changed about how you see the risk/reward.

The goal of selling a put option is to potentially buy that specific stock at a much cheaper price that where it’s currently trading.

I believe you are referring to the CSCO $37.50 put-sell trade.

When the trade was initiated, CSCO stock was trading for $50 per share.

Our goal was to potentially buy CSCO for $37.50 per share sometime down the road at a $12.50 per share discount (from $50).

We liked the idea of buying CSCO at $37.50 instead of buying it at $50.

How can we achieve that? By selling the $37.50 put option. And in the process of selling that put option, we were paid $25.

You don’t necessarily need to look at the $25 as the only reward.

The reward would ultimately come if you end up buying CSCO for $37.50 per share and watch its price rally back up.

You see, you’re selling insurance to someone that you’ll be there to buy CSCO at $37.50 if the stock prices happens to fall (like it is now).

In exchange for your obligation to step in and buy CSCO at $37.50 if it falls to that level is you receiving $25.

If CSCO never falls below $37.50 by the expiration date, then you won’t get to buy the shares. But you will get to keep the $25.

If CSCO does fall below $37.50, then you will be forced to buy the shares at $37.50.

Even if CSCO falls to $30, you’ll still have to buy them at $37.50.

Of course, the ultimate risk is if CSCO falls to $0. Do you see that happening? I don’t.

But you have to assess whether you’d be comfortable buying CSCO at $37.50.

We recently rolled this trade down to the $35 strike price, so now we’ve contracted ourselves to buy CSCO at $35 instead of $37.50.

The put option buyer is paying you for your service. That service is buying CSCO if it drops below the strike price. Are you comfortable buying CSCO? That’s what you need to decide before entering into any put-sell trade.

And what if you end up buying CSCO at $35 and it rallies back to $50? Well then, you’ve made yourself a nice little profit, much more than the $25 you think is the only reward.

Yes, there’s risk in the trade, but it’s no different than buying an individual stock. Any stock can fall in price.

With a put-sell trade, you’re just doing it a little bit differently. The ultimate goal is to buy the stock, but in this case, someone will pay you cash for your efforts.

I hope that helps.

Q: Hi, Lee,

Couldn’t read your email until now, but….

Just bought-back the CSCO put contracts at $1.49 and then sold-to-open 5 contracts at $1.56.

In this turbulent market today I’m pleased to have a new CSCO put situation with about 15% safety with a $35 profit on the transaction.

Thanks for your guidance!! You are the best!!

A: There you go! This ties in with the question above.

Q: Hi, Lee.

By the time I was able to enter today’s defensive trades, the market had moved so much that the roll trade prices were inverted from what you prescribed. I opted to not place either of the trades. My situation raises some strategy questions…

Since your roll trades were presented as “day only” trades, what do I do tomorrow, or the next day or the next day? Am I now flying solo or will you continue to follow the trades for those of us who did not get “in” today?

If I have the capital available to make good on the existing put options if they are “called”, do I really need to do anything? Seems like my worst case scenario would then be to own CSCO at $35/share and ADM at $36/share.

If my Puts are “called”, how will I get notified? Will that exercise be automatic or will I be given [say] 24 hours notice to transfer cash into the account for the purchase? Will my tax basis then be the strike price or will it be strike price less my initial receipt of proceeds from the sale of the Puts?

Thanks!

A: Hi, as the market has rallied on occasion this week, it should’ve been easier for you to execute the roll trades at decent prices, some better than our official marks.

I believe I had given the instructions that if not filled on the day-order, then it should be entered again the next day. This was done so you could re-assess and see where the option prices are trading. Leaving the GTC order could negatively affect where you might be filled on crazy days like we’ve been having.

And yes, if you have the capital and are comfortable buying the stocks at the stated strike prices, then you don’t need to do anything. You’ll just wait to see where the stock ends up at expiration.

If you are “assigned” (not “called”) on the puts, your broker will automatically drop the shares in your account and will debit your balance for the full purchase price.

Your cost-basis should be the strike price minus the credit received. But since I’m not a tax professional, it would be best to consult with yours to make sure.

Q: Lee,

With the rapid market retreat, Walmart declined below the put strike for the Fence strategy you recommended last month. Is that also a candidate for the roll strategy as was done for ADM and CSCO?

A: Hi, since the WMT trade was an unofficial recommendation, we will not be actively following it.

But, the expiration date is two weeks away and there is still cushion for the put-sell portion of that trade. The call option will most likely expire worthless.

You have a few choices:

Hold, and see if WMT stock finishes above the $110 strike.

If WMT falls below $110, do you want to buy the shares? If not, a roll trade might be necessary.

Let’s hope for a rally!

Ok, that’s all for today’s long alert. Glad this week is over!

Continue to hold all other open positions as-is.

Contact us here instantincome@dentresearch.com with fills, comments, questions or concerns.

Enjoy the weekend.

Regards,
Lee Lowell
Executive Editor, Instant Income Alert

February 28, 2020

Obviously, the market is panicking.

The selling is coming hard and fast now, and it’s time for us to play a little defense.

As a reminder, the stock market has ALWAYS been the best avenue to build long-term wealth, and that’s our main goal at Smart Option Seller.

We sell put options to either gain the income when they decline in value, or we take ownership of the stocks if we are assigned, which would be at very cheap cost-basis levels. Always remember those core concepts.

Even with all the selling that has occurred this week, NONE of our positions have breached the strike prices. That’s comforting to know. That’s why we always choose strike prices with large downside cushions.

Now, that won’t stop us from feeling paper losses from time to time as stocks retreat, as that will temporarily push up the option prices.

In those situations, we can sometimes make the decision to either hold the trade as-is, or take defensive action.

Today, we will take some defensive action in the form of “rolling” positions.

To roll a trade, we will buy back current positions (which will lock in a loss), and re-sell another put-sell position in the same stock using a different strike price and expiration date. By doing so, we will collect a larger premium than the locked-in loss. This can lead to an overall winning trade at the conclusion of the secondary trade.

Let’s go!

Cisco (CSCO)

We are going to roll our CSCO put-sell position.

We will be buying back the current position and re-selling a new put-sell position.

If this is your first experience with a roll trade, please read the instructions carefully.

Note: you will only execute this buy-back trade if you already hold the put-sell position in your account. If you don’t have the position, you can disregard these instructions.

Action to take: Buy back (buy-to-close) all of the CSCO June 19, 2020 $37.50 put options as a closing transaction (buy-to-close).

Action to take: Sell (sell-to-open) the CSCO October 16, 2020 $35 put options as an opening transaction (sell-to-open).

You’ll notice that I didn’t put any prices on each option trade. Here’s why:

Currently, the June put option is worth about $1.35 per contract.

The October put option is currently worth about $1.48 per contract.

We want to make sure to sell the October put option for more than what we’ll pay to buy back the June put option.

This way, you’ll come away with an overall credit between the two trades.

Here’s how you will execute this two-part transaction:

If you feel comfortable doing this, or able to ask your broker for help, you can execute both trades in one single transaction called a “diagonal options spread”.



This way, you can specify a total credit between the two trades instead of having to manually execute two separate trades.

Doing the spread trade is easier, but I also understand not everyone is knowledgeable, or even comfortable doing it, considering we haven’t executed a trade like this yet.

If you cannot (or don’t want to) execute the spread trade, you can certainly execute two separate transactions.

So, let’s make sure we’re all on the same page so there’s no confusion.

Action to take: We want to buy-back (buy-to-close) the CSCO June 19, 2020 $37.50 put options and sell (sell-to-open) the October 16, 2020 $35 put options.

At the moment, the October put option is more expensive than the June put option. That’s good!

Make sure that if you execute these two trades as a single spread trade, you enter it for a credit. Make sure to check the option prices on both positions before placing your order so you know what to look for.

If you are going to manually execute two separate trades (because you can’t figure out how to do it as a spread), then you still need to make sure you sell the October put option for a greater price than what you buy back the June put option.

As I’m seeing it now, the October put option can be sold for at least $.15 per contract higher than what the June put option costs.

Good?

Lastly, you will execute these trades as “day-only” orders, not GTC (good-til-canceled). If you are not filled today, then your order will automatically cancel at the end of today’s session, and you will have to manually re-place the order tomorrow.

I’m doing this because prices can fluctuate more than usual from day to day, so I want everyone to have the best shot at getting the best prices.

Archer Daniels Midland (ADM)

Same thing with ADM. Please read the instructions carefully.

Note: You will only execute this buy-back trade if you already hold the put-sell position in your account. If you don’t have the position, you can disregard these instructions.

Action to take: Buy back (buy-to-close) all of the ADM June 19, 2020 $36 put options as a closing transaction (buy-to-close).

Action to take: Sell (sell-to-open) the ADM September 18, 2020 $34 put options as an opening transaction (sell-to-open).

You’ll notice that I didn’t put any prices on each option trade. Here’s why:

Currently, the June put option is worth about $1.25 per contract.

The September put option is currently worth about $1.35 per contract.

We want to make sure to sell the September put option for more than what we’ll pay to buy back the June put option.

Regards,
Lee Lowell
Executive Editor, Instant Income Alert

February 28, 2020

Wow, if you watch the markets like I do, you would’ve seen the acceleration of the selling in the last hour of trading yesterday. It was quite severe.

The good thing about our roll trades from yesterday is that we were able to execute them while the markets were near the highs of the day. This was fortunate, as put option prices were at their lowest, which meant better prices for us.

We are definitely not out of the woods yet, though.

The selling could continue, and we might need to roll more of our positions.

As a reminder, it’s important (if you can) that you check your emails and text alerts during the day as messages from me could occur at any time. This can help you achieve better fill prices.

Let’s go over the trades we made.

Cisco (Nasdaq: CSCO)

Obviously fill prices can vary greatly during times like these, especially when you all might enter at different times of the day. I try to use a representative fill price based on what you send me, along with the “Time & Sales” report after the alert is sent.

Here’s what we did:

Bought back (bought-to-close) all of the CSCO June 19, 2020, $37.50 put options as a closing transaction (bought-to-close).

Sold (sold-to-open) the CSCO October 16, 2020, $35 put options as an opening transaction (sold-to-open).

The average spread price between the two put options came in at $0.12 per spread, meaning the October options were sold for $0.12 higher than what the June options cost to buy back.

We’ll take prices of $1.50 and $1.38 respectively. Your individual prices might differ, but that doesn’t really matter.

What matters most is that the spread was done for a credit.

And one of the best things about rolling trades is that we’ve lowered our risk in the trade by $2.50 per share (from $37.50 to $35). More cushion to help buffer more selling in the markets.

For now, we will lock in a loss on the June position of $1.12 per contract, as we originally sold it (sold-to-open) for $.26 per contract.

But with the sale of the new October position for $1.50 per contract, we could conceivably walk away with a $.38 per contract total profit between the two trades if the October position expires worthless.

At this point, we have to wait it out to see where CSCO trades over the next few months.

Archer Daniels Midland (NYSE: ADM)

Here’s what we did:

Bought back (bought-to-close) all of the ADM June 19, 2020 $36 put options as a closing transaction (bought-to-close).

Sold (sold-to-open) the ADM September 18, 2020 $34 put options as an opening transaction (sold-to-open).

The average spread price between the two put options came in at $0.03 per spread even though it was worth about $0.15 when I wrote up the alert.

The lower spread price meant that ADM stock was selling off during the time of calculating fill prices.

The October options were sold for $0.03 higher than what the June options cost to buy back.

We’ll take prices of $1.29 and $1.26 respectively. Your individual prices might differ, but that doesn’t really matter.

What matters most is that the spread was done for a credit.

Again, one of the best things about rolling trades is that we’ve lowered our risk in the trade by $2.00 per share (from $36 to $34). More cushion to help buffer more selling in the markets.

For now, we will lock in a loss on the June position of $1.01 per contract, as we originally sold it (sold-to-open) for $0.25 per contract.

But with the sale of the new September position for $1.29 per contract, we could conceivably walk away with a $0.28 per contract total profit between the two trades if the September position expires worthless.

At this point, we have to wait it out to see where ADM trades over the next few months.

Obviously these are scary times for being an investor.

The coronavirus was the spark to initiate the selling, and with the unknowns surrounding it, it’s hard to tell how long or how severe the sell-off may be.

As I’ve said in the past, “normal” pullbacks are necessary to keep the market efficient and steady, but pullbacks like these do nothing except incite panic.

When markets go up unabated to unrealistic highs (like it has), unfortunately the drops are very swift and scary. That’s where we are now.

And with the unknowns surrounding the coronavirus, we will most likely see more of the same for the foreseeable future.

But I will say, stocks are getting very oversold here and value will be found at some point.

I’m not advising in any way to jump in here, but if you have some dry powder (free cash), then it may be worth nibbling a little here and there on the highest quality stocks.

Ok, that’s all for now. If we have to roll more trades today, expect another alert during the day.

Continue to hold all other open positions as-is.

Contact us here instantincome@dentresearch.com with fills, comments, questions or concerns.

Have a great long weekend, as the markets are closed on Monday

Regards,
Lee Lowell
Executive Editor, Instant Income Alert

February 25, 2020

Definitely a doozy yesterday in the markets. The Dow gave up 1,000 points, the S&P 500 gave up 112 points and the Nasdaq lost 355 points. All told, it was a loss over 3% for each. We haven’t had a one-day move like in a few years.

Big corrections like that scare people because they’re so fast and powerful. But if you look at the numbers, we’re at levels that we hit at the beginning of February which was putting us near all-time highs.

It’s all perspective. We’ve gained so much over the last year that this one-day blip lower really doesn’t affect the outcome of the bull move all that much.

But it’s the speed by which the drop happens is what’s most frightening. Couple that with the coronavirus fears, and we have a perfect mix of increased volatility and panic selling.

Let’s not lose our cool though.

Remember, stocks are actual companies that make actual products that make actual profits. That reality isn’t going to change.

It’s the effect of the coronavirus that may alter those profit numbers for a short period of time. We just don’t know how deep though.

But just like every other perceived catastrophe, the market bounces back because companies continue to make products that people will buy and pay for.

It’s finding that equilibrium that dictates what the stock price should be, so there’s no surprise that we should be seeing some selling here. Stocks were priced to perfection, and now a bit of the bubble is bursting.

So let’s stay the course, see how things play out in the near future, and remain cautious with our high-quality trades.

Our Current Positions

One thing to remember, we, as put-sellers, have two primary goals:

Sell deep out-of-the-money put options on high quality stocks to collect the income. Hopefully these trades expire worthless, or we buy them back at the “80% Rule” threshold.

Try to build a long-term portfolio of high-quality stocks from very attractive cost-basis levels. The stock market has been the greatest wealth creator over the last 100 years (for at least that long). It has been better than any other asset: gold, real estate, commodities, etc.

In order to build that long-term portfolio, stepping up and buying stocks at some point has to occur. That might even mean buying stocks in the face of big down-moves, one that could occur from the coronavirus.

Obviously, we would all like to buy stocks when the bottom hits. But do you know when the bottom is in? I certainly don’t. Nobody does.

That’s why it’s smart to buy along the way. This helps build the portfolio overtime at various levels.

Now, I’m not saying that we will have to buy the stocks that we’ve sold the put options on. There’s still time left in each position.

What I’m saying is, as long as you are okay with that mentality (of building a portfolio), then we should end up being very successful in the long run.

We currently have six open positions in the portfolio.

At this time, due to the big drop in the markets, we are slightly underwater in all positions.

Cisco (Nasdaq: CSCO) is our biggest downer at the moment.

One thing to note: each stock price is still above the put option’s strike price.

Even with the large sell-off, we still have a downside cushion between the stock price and the strike price, which is highly beneficial.

On the flip side though, it doesn’t stop the put option price from rising. This is why we are currently at a paper loss on the positions.

Once the market finds its footing and starts to stabilize (hopefully soon), the put option prices will start to recede, putting our positions back into profitability.

Until then, we retain our cautious tone and wait until there’s more clarity. It doesn’t make sense to put our money at risk if the downside freight train keeps rolling.

Continue to hold all other open positions as-is.

Contact us here instantincome@dentresearch.com with fills, comments, questions or concerns.

Regards,
Lee Lowell
Executive Editor, Instant Income Alert