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Each month I receive hundreds of emails from Automatic Trading Millionaire subscribers. Below, you’ll find a comprehensive Frequently Asked Questions report I’ve put together to answer your most pressing questions about put selling and what you can expect in my service.
Of course, there are more questions out there, so I will regularly add to this report in the future. I always strive to provide as much helpful feedback as I can. Keep your questions coming by sending an email to mailbag@oxfordclub.com!
Frequently Asked Questions:
- Why will my broker only allow me to sell cash-covered puts?
- How much cash do I need to follow your service?
- How does margin work?
- Can I sell puts in my IRA?
- What’s the holding period for each Automatic Trading Millionaire trade?
- Why don’t we just hold until expiration since we want to buy the shares at a discount?
- How do you mark your fills?
- What price should I try to get filled at?
- What will happen to your put-selling strategy in a market correction?
- Do you use stops on the options you recommend?
- How many puts should I trade?
- Will I get put?
- What happens if I get put?
- Can I do anything to prepare for being put?
- When is the best time to trade options?
- What if the option price(s) I see are different from the one(s) you quoted in your email?
- Can I get a copy of your track record?
- My broker says put selling is very dangerous; is that true?
- How are option prices determined?
- Does volume affect an options price?
- Is it possible that I won’t get filled at your recommended price
- Do you sell covered calls?
- How does volatility affect the price of puts?
- How is it possible that the price of a put option could drop while stock’s share price remains the same?
Why will my broker will only allow me to sell cash-covered puts?
Brokers who do not believe that you know how to sell puts will let you sell only cash-covered puts where you are putting up all the cash instead of just 15% on margin.
My advice? Get a new broker. Our Pillar One Advisors can help you get started on any of our trading strategies. Specifically, I recommend Greg Long of International Assets Advisory in Melbourne Beach, Florida. You can email him at glong@iaac.com or call International Assets Advisory at 800.329.1984.
Additionally, I encourage you to review our Automatic Trading Millionaire Signature Success Series, specifically Part 5 and Part 6, which discuss common brokerage requirements and teach you how to select a brokerage that fits your needs. Familiarizing yourself with the material covered in this comprehensive FAQ will also help you assure your broker that you understand the ins and outs of put selling.
How much cash do I need to follow your service?
At a minimum, you will need between $15,000 and $25,000 in liquid cash or stock to act on the trades I recommend. Beyond that, it will depend on how much additional cash you wish to allocate in order to maximize my recommendations.
Remember, the large capital requirement ensures your ability to purchase the underlying shares, if the need were to arise. However, history has shown that we will get put only about 20% of the time, so expecting that you will be put on every single position is faulty thinking.
Keep in mind that since we hold anywhere from four to 10 positions at any time, you will be restricted to selling only one or two contracts if you have a smaller account or hold a few positons. I suggest that you invest only in companies that you are comfortable with.
How does margin work?
“Margin” refers to the cash or securities you must have as collateral before trading options. Margin requirements vary broker to broker, but all brokers will require you to place the cash or securities in a “margin account.”
Margin trading is helpful because it allows you to sell more put contracts than you might normally be able to. When your broker offers you margin to sell puts, this means he will loan you up to 90% of the amount needed to execute a put-selling trade. You are required to come up with the other 10% to 25%, depending on the stock or the broker.
That 10% to 25% must be either in cash or stock that could be liquidated (if you’re “put” and required to buy the shares). If the share price of the underlying stock decreases, your broker has the option to increase your margin requirement.
Can I sell puts in my IRA?
Yes. But unfortunately, you will not be allowed to trade on margin. Instead, you can sell what are called “cash-covered” or “cash-secured” puts.
This is the least efficient way of selling puts, since it restricts the cash in your account to cover the cost of the shares in the event the option is exercised… making your return on capital deployed low.
However, if you have cash sitting around in your account, the return from cash-covered put selling should be much higher than what your broker pays on cash, and you will still have the chance to buy quality stocks at a much lower price.
What’s the holding period for each Automatic Trading Millionaire trade?
For the most part, the holding period will be determined by the action of the underlying shares. We look to exit each positon once we have gained more than 50% of the original premium received, if more than half the holding period remains.
For example, if we sell a put for $1 with an expiration date that is nine months away, we will cover the position early if the value of the put falls below $0.50 and there are at least five months left until expiration.
Our goal is to minimize the time that we hold the puts while enjoying a favorable risk-to-reward ratio. If we can gain 50% in a quick time frame, why risk waiting until expiration? The average holding period for our positions is four months.
Often we will sell puts that expire in a year or so to gain a lot of premium and obtain a satisfactory downside cushion. This will be the case during periods of low volatility where options premiums are also lower. During periods of normal or elevated volatility, we will enjoy even shorter holding periods.
Why don’t we just hold until expiration since we want to buy the shares at a discount?
Holding until expiration is your personal choice and may be a very wise one. However, in making my recommendations to benefit all Members of the service, I must keep in mind that not all Members have the capital (or desire) to do so. That is why we usually take the trading stance mentioned above and close positions early.
Our goal has two competing parts: We want to collect a high premium, and we want to own the best stocks cheap. You must decide which exit strategy suits your need best.
How do you mark your fills?
Our Research Team monitors all the initial trades after a recommendation is made. They decide based on volume and price. We will not count a position as filled unless we see at least 500 contracts trade at or above our limit price. They will take the price between 10 and 20 minutes after the trade recommendation is issued and we begin to see the volume increase.
What price should I try to get filled at?
Every time I issue a new recommendation, I will provide strict limit prices. We use limit to indicate the lowest price you should accept.
Usually the limit price I recommend is well below where the options are trading. You should always be patient and try to get filled at a higher price.
A good first step is to place a limit order between the bid and offer and work your way lower. Hitting the bid is a sure way to get the lowest price.
The same applies if and when you buy back the puts. Try to buy the puts back between the bid and the ask. The ask is the highest available price, and you are just paying extra if you don’t put in the effort to get a lower price.
What will happen to your put-selling strategy in a market correction?
If the market corrects, it will likely be a short-term event and share prices should bounce back quickly. Because we build in a 20% to 50% discount to market price when we sell puts in Automatic Trading Millionaire, we are better protected than most investors.
However, options buyers and sellers do not have the benefit of trading outside market hours, so our losses may appear magnified during the period of the correction. It is rare to get put during a correction unless it is prolonged.
In a bear market where the markets trade lower for a long stretch, we may initially get put or be forced to roll over our positons (see below for more on what this means), which could result in some losses. While there is no way to totally avoid losses when investing in the market, we should be able to offset the losses when we roll the positions over by selling puts for much higher premiums on new positions thanks to increased volatility.
Do you use stops on the options you recommend?
No. We do not. Our goal is to collect income and/or to buy the shares at a discounted price. . There is no point applying a stop loss to the option price, as it will fluctuate by greater than 25% during our holding period. You may the see the value of the option double or triple if the underlying stock has a short-term hiccup. It happens. Just remember that we will not close out of a position unless there is a very good reason to do so.
If we are put and choose to maintain the stock position, we will then apply a 25% stop loss from our adjusted cost, just as we would do with a normal stock recommendation. Our formulas look at the probability of being put at expiration and do not measure the ups and downs during the holding period.
We have seen several of our positons trade at a loss during the early part of the holding period only to become winners prior to expiration. It’s normal. If you are a panicky investor, then you need to be sure to allocate your capital in a way that allows you to sleep at night.
How many puts should I trade?
Keep in mind that every contract controls 100 shares. So you should trade only as many contracts as you are comfortable holding in the event you are put the shares.
The last thing you need is a heart attack in the event you get put. Saying that you “didn’t expect to get put” will not prevent the pain.
You can expect that we will be put at least 20% of the time, on average. You must be ready. One way to avoid the panic is to position size. Don’t be greedy; be smart.
Will I get put?
There is no way to guarantee the outcome of any trade. While we don’t actively try to get put, our history of trading suggests that we will get put 20% of the time.
This could mean that we don’t get put for two dozen trades and suddenly get put six picks in a row. It’s random, but it could happen.
Every recommendation I issue must meet a set of very specific criteria. If I calculate more than a 20% probability of getting put, I don’t recommend the trade. Therefore, it is critical that you remain disciplined in always following my limits.
What happens if I get put?
Don’t panic! If you get put, it simply means the stock is trading or has closed below our strike price at expiration. You can be put the shares at any time, not just at expiration.
However, you will not get put if the underlying price is above the strike price. And it is unlikely that you will be put prior to expiration unless the shares are significantly lower than the market price.
If you do get put, your broker will automatically buy the shares for you. This means you will need to have adequate capital in your account to buy the shares. You can buy the shares either outright or on margin.
Can I do anything to prepare for being put?
If I suspect that we are going to get put, I will clearly communicate that, and we will be prepared for it. I will also ensure that you understand the strategies you can use to avoid getting put if that is not your desired outcome.
The first strategy is to buy back the puts that you sold. This closes the transaction. If you buy back the puts for a higher price than you sold them for, you will realize a loss.
The second way to avoid being put is to buy back the puts that you sold to close the position and then sell new puts that expire later to recoup your losses and potentially collect more premium. This is called “rolling over” a position.
For those of you who want to take possession of the shares, you’re put at the highly discounted level. You can take possession and then sell call options on your new position (covered “call writing”) to collect even more income. Or you can hold on to the shares with no options attached.
If you wish to take position of the shares, I will always offer both options to you: either to roll the position over or to take possession and sell covered calls. Your choice will depend on your particular situation.
In rare situations, we may also take the loss if there is adverse news or a change in the company’s fundamentals.
When is the best time to trade options?
The options market trades based on what the stock market does. If you trade options before the stock market has a chance to digest overnight news, you will likely get the worst prices. A good rule of thumb is to wait until at least 9:50 a.m. ET before you place an options trade, unless you are using strict limit prices.
What if the option price(s) I see are different from the one(s) you quoted in your email?
In this scenario, I recommend that you wait until the price comes back into range and all other parameters (as stated in my alert) are met.
You can adjust your entry price or exit price to one that you are comfortable with as long as it is within a couple of percentage points of the ones in my alert.
If neither option is possible, sit back and wait for my next pick. The markets are fluid and prices change.
When I make a recommendation, I will usually allow for some leeway. So far in the history of Automatic Trading Millionaire, there has been only one occasion when the volume at or above our recommended price was not adequate (did not reach more than 500 contracts) for us to mark the trade as executed.
Can I get a copy of your track record?
Yes. Please contact your VIP Member Services by emailing mailbag@oxfordclub.com.
My broker says put selling is very dangerous; is that true?
It depends on whether you have a methodical, proven system in place or not… and many individual investors do not. A gun is very dangerous if you don’t know how to use it. The same logic applies.
What sets Automatic Trading Millionaire apart is that we have a system for identifying the very best put options… ones that present the chance to buy top companies at discounts of 20% to 50% from current market price. This benefits us in two ways: We build a cushion well below the market price, and we get paid a cash premium.
Additionally, our track record speaks for itself… boasting a win rate of 100%, as of this writing (January 2018). That kind of performance is a testament to the safety of selling puts using my strategy. Even if a trade were not to pan out as planned, we have strategies in place to generate income from any position that we ultimately will own.
In certain scenarios, brokers are right to discourage investors from selling put options. After all, a client who takes massive risks without understanding put selling is a liability. When using margin, your broker’s money at risk too.
Trading stocks successfully time and again allows for a certain level of comfort. Put selling is no different in terms of the need to understand the underlying company, the economy and the markets. The same fundamental analysis is performed to select a put sell as for buying or selling a stock. By following the same companies, we develop a sense of familiarity that is more targeted than if we choose a different company every single time.
How are option prices determined?
The price of an option is determined by using the options pricing model, which is based on a Nobel Prize-winning formula called the Black-Scholes model. The Black-Scholes equation is a complex formula that calculates the value of an option based on volatility, the risk-free rate of return, days to expiration and the underlying share price. (You can read more about here.)
Market makers can also influence the price of an option depending on supply and demand. (To learn what a market maker is, click here). Less liquid options (ones that are not traded much or are on obscure companies) are more difficult to trade, which is why we tend to focus on more liquid names.
Does volume affect an options price?
Yes. However, I counter that by recommending trades on highly liquid stocks that have liquid options markets. Since we are choosing options that are not close to the price at which shares are currently trading, we must observe strict limit prices on entry and exit. This allows the market to “come to us.”
Is it possible that I won’t get filled at your recommended price?
Yes. But remember… you don’t have to get filled within a few minutes of getting the recommendation. Give it some time.
If the underlying share price falls within a few hours or days, the options price will return to higher levels, and you may get filled at more than the recommended price.
The key is to be patient, follow the parameters of my trade recommendation and use limit orders. If you are comfortable getting a few pennies less than the recommended price, that is fine as well. Our recommended prices are set based on the price at the time of the recommendation, with about a 5% to 10% leeway for price fluctuation.
Do you sell covered calls?
To date, I have not recommended covered calls in Automatic Trading Millionaire. But that is only because we have not gotten put on any of our trades.
In the event we do get put, we may employ a covered-call strategy… unless I recommend rolling over the option or exiting the position. I am a big fan of covered-call trading, as it also has the potential to generate substantial income if done properly.
How does volatility affect the price of puts?
Volatility is one of the main components of options prices. If volatility is high, options premiums will be higher. During periods of high volatility, you can reduce expiration times significantly. The opposite is also true. During periods of low volatility, you will collect a larger premium by selecting an option with an expiration date that’s further out in the future.
However, regardless of overall market volatility, some sectors will usually experience volatility while others are stable. This is known as noncorrelated trading. It is something we take advantage of.
How is it possible that the price of a put option could drop while stock’s share price remains the same?
As time expires, your put premium decreases. This is known as time decay of options.
Since options expire, each day that goes by means one less day that the option is worth something. So whether the share price stays the same, moves higher or even moves a bit lower, the premium will lose value over time.
If share price volatility decreases, the option could lose premium even faster. But the opposite is also true. If volatility in the market or sector increases, an option’s premium could increase without any move in the underlying share price.