The title of this post might catch the eye of most Main Street beats Wall Street readers. Why? Because it had the word “Put” in it. I’ve been trying to teach the world of options with this site since Jan 1, 2016; going on 2 years. In that time you can probably count the amount of Puts I’ve traded on one finger lol. Suffice to say, if you only read Main Street beats Wall Street for your option’s education (which I don’t recommend) you probably don’t know much about Puts.
Well I just sold a Put on RH. Let’s talk about this trade a bit.
With the stock at $73.50 I sold 10 contracts of the RH 9/22/17 $72.50 Put. The premium was $1.50 for a total of $1500. When you sell a Put option you have the obligation to buy the said amount of stock (in this case 1000 shares) at the Strike Price ($72.50) if the buyer of the Put wants to sell them to you. I have the obligation to buy these share, if they are put to me, on or before the Expiration Date (this coming Friday). If Rh goes below the Strike Price of $72.50 I will have the shares put to me at whatever price the stock is at at the time of assignment. If RH goes down to $71.50 I am obligated to buy the 1000 shares at $72.50. If the RH goes up to $74.50 the shares will not be put to me. The owner of my option will not put the shares to me at $72.50 if he can sell the shares on the open market for $74.50. Clearly I want the stock to stay above the Strike Price of $72.50 so I don’t have the stock put to me and the deal would end with me keeping the premium of $1500.
Why did I do this trade? I really like the stock RH since their earnings came out last week. I think the stock is going up. If there is a profit taking pullback and I have the 1000 shares put to me it won’t be the worst thing. If the stock goes below $72.50 I think it will be temporary and I’ll own shares of a stock I like. Clearly I don’t want the stock to be put to me and go down to $50, but in this game anything can happen! Because of this fact this trade gets a Risk Factor 3.
Notice the “P” (Put) in the option order form. With most of my trades you see a “C” (Call).
9/18/17 – Sell to Open 10 RH 9/22/17 $72.50 P @ $1.50 (+$1500)
For my season trade of this post I sold 10 contracts of Tripadvisor (TRIP) Call options. The stock has been on a run lately and I think it’s due for a pullback or at least level off. With this outlook I sold a Naked Call. I do not think the stock will get to my Strike Price. This is a Naked Call so it gets a Risk Factor 5. However, I did enter a Buy-Stop order to buy the stock if it gets up to $45.40, a little lower than my Strike Price. The Buy-Stop order gives me protection because if the stock gets up to the $45.40 it will automatically be put into my account to cover my Naked Call. These types of orders are only executed while the market is open so I’m not protected if the stock moves above the Strike Price while the market is closed.
9/18/17 – Sell to Open 10 TRIP 9/22/17 $45.50 C @ 55¢ (+$550)
When I sold this Naked Call the stock was at $44.55. As I write the stock is down to $44.08
Steve
The Options Coach