So I just started trading…about 2 weeks ago. I’d been thinking about it for years, I’ve watched thousands of options videos. Literally thousands! I’m the producer of CBOETV so, yeah, I’ve created…edited…filmed…reviewed ohhhhhhhh about 10K options related videos. BUT I’d never placed a single options trade. I decided it was time to stop buying shoes, and start trading options!
Of all the strategy content I’ve produced, I was hyped to selling puts income as my game plan. In my own paper trading, I never had much success with speculating on stocks by buying calls. What really spoke to me though, is that I could sell puts on a stock that I’m bullish on, and that I would eventually like to get long. THEN, I would plan to start selling covered calls on that position. So I jumped in at the first part of my plan, selling the puts for income. I determined which stock I wanted to start out with, and that’s FitBit. The idea here is that I’m going to sell puts in FIT, pocketing the premium, until eventually I am obligated to buy the stock. Check out this video I produced with my pal, Peter Lusk, Senior Instructor at the Options Institute – Peter explains the CASH SECURED PUT STRATEGY.
Two weeks ago was expiration for my first trade ever. I had sold $41.50 FIT put for $120. FIT closed at $47.17 on expiration Friday, thus, I kept my $120 less the commission.
I still remain bullish on FIT for the long term. I eventually want buy 100 shares of FIT, so….I did it again. I sold another put. I didn’t want to wait until traditional expiration, so I looked at the weeklys.
Really clutch thing to note here – it’s EARNINGS season! Any stock or options you’re trading, you have to know when the earnings is, because it’s probable your underlying could make a big move. This is especially true of tech names, and especially especially true of stocks which IPOd and have not reported a first earnings yet. All this 411 fits FIT. I looked up earnings for FIT and discovered they are Wednesday Aug 5th after the close. That will play into what I do when I put a new trade on AugWk1.
Back to this week, how did I select a strike? Well, I’m looking to make at least $100 a trade after commissions & I want the probabilities to be mostly in my favor. How do I determine that? I look at the delta of the trade. I’m looking for a delta of 30 or less. That means I have a 70% chance that FIT will close over the strike I’ve selected.
One other thing… the puts closer to the price of the stock, yes, DO have more premium than the puts I’ve sold. IF I was just in this to profit from the put selling, I might go a little closer to at the money, and maybe buy the put back in if I didn’t want to buy the stock. But I do want to get long 100 shares of FIT, and I’d like to pick up FIT as close to $40.00 a share as I can, that’s a big part of why I chose the 41.50 & then the 42.50 strikes. If FIT moves higher, I’ll reevaluate what I’m selling and what I’d like my entry point to be, collecting premiums to help me finance the purchase along the way.
OK so here’s my trade. FIT was trading 45.71, it was trading up on a big down day. I sold a $42.50 JulyWk5 Put for $1.02, the bid was .95 & the ask 1.20.
Lessons learned, I like that FIT was up on a big down day in the market, but I bet if I’d waited until FIT pulled back a little, there may have been a little more premium in FIT. In fact, the next day the market was down again, as was FIT and I could have sold that same put for $1.75. I’ll look to be more savvy about where I’m selling in the weeks ahead. We’re at expiration Friday as I’m writing this and FIT is trading $44.78, looks like I’ll collect my premium. I’ll be back next week to sell another put on the week of FIT earnings! STAY TUNED…
Post written by Holly Goodhart, Producer, CBOETV