 What's up, everybody? Lilo here from smartoptionsale.com. Today is Saturday, January 28th, 2023. We're pretty much blowing through January here really fast. What are we doing? Well, welcome back to another edition of our Saturday YouTube Options Educational Videos. I hope you've been watching us for a while. I give you all this free information coming from my 30 plus years in the business. I've been an options trader for a long time. I read the charts and that's how I decide when to get in and out of trades. Our main gig, though, at the smartoptionsale.com is selling put options and selling put option credit spreads. That's our bread and butter. So I've been making these new videos for 2023 just going over the basics of what we do. And selling put options is our main thing. And along with that, there's other things that people wanna know. I get emails all the time, how do you pick the stocks? How do you pick the strikes? What are your methods? When do you take profits? So today, what we're gonna do is I'm gonna teach you the smartoption sellers 80% rule for taking profits or when we take profits. In our newsletter, the smartoption seller newsletter, when it's time for us to take profits on the puts that we sell, we use the 80% rule. So that's what I'm going to show you today. But first, before we get into that, once again, I want to bring everyone's attention to our website, smartoptionseller.com. I want everyone, if you have not already, get a free copy of our Put Selling Basics ebook. Put Selling Basics is all about put selling, what it is, how we do it, why we love it so much. And once again, it's free. So go to our website, click on the Put Selling Basics header here, scroll down, read a little bit about it, and then put your name and email address in here. And we will send you an email. And within that email is a link to download the free copy. So please do yourself a favor and get that. All right, so let's go back to, let's talk a little bit about once again, go over the basics of what Put Selling is, and then the ways that you sell Put Options, what the mindset is, there's two ways to look at Put Selling. So number one, if you sell Put Options, it is a way for you to do two things. Number one, to gain a current income stream. When you sell something, people pay you for that thing. And what you're selling is a Put Option to another person. You're selling it to the Put Option buyer. And what are you getting out of it when you sell Put Options? Well, basically what you're doing is you're offering insurance to somebody on their holdings, okay? If you sell a Put Option on a stock at a certain strike price, what you're doing is you're obligating yourself to potentially buy that stock at that strike price level sometime in the future, okay? If you've been watching these videos, so let's just say the stock's at 100, and you're thinking, you know what? I wanna try to buy this stock at $80 a share. So what you do is you would sell a Put Option at an $80 strike price, which obligates you to buy 100 shares at $80 a share if and only if the stock actually falls from 100 down to $80 at the expiration date. Now, in exchange for your obligation to do that, someone will pay you money. The Put Option buyer pays you money to be there to buy the stock from them if the stock actually falls down to $80. And they're going to pay you the money, the upfront money. It's called the Option Premium. And if the stock doesn't fall down to $80, well, then you're off the hook and you don't have to buy your shares, but you still get to keep the premium that the Put Option buyer paid you. Just like an insurance company, you know, you pay your insurance premiums each month or every year, however you do it on your car and your home, life insurance, whatever. And if you don't get into an accident and if your house doesn't burn down and if you don't die prematurely, the insurance company keeps your money. So it's the same thing with selling Put Options. If the stock doesn't fall to the strike price by the expiration date, you keep the cash. And it's a great way to, you know, create an income stream because think about all those times if the stocks don't fall to that level, you just keep the money. Now, the other thing that you can do when you sell Put Options is that you actually want to buy the stock. You want to get a sign that's called, that's the process called getting a sign. You actually want the stock to fall to $80 so you can buy the stock. In our newsletter, what we do is we're, our goal is really not to buy the stock. We don't want the stock to fall down to the strike price. We just want to keep collecting the money. But in the off chance, the stock does fall to the strike price. Well, then you have to buy the stock and then you get to hold the stock forever. The stock go back up to $500 a share, whatever. And you have an unlimited, you know, profit potential in the future. But what we do with the smart option sellers, we sell the Put Option as the initial transaction. And what we want to do is we want to buy that Put Option back sometime in the future at a cheaper price, okay? So that's what a lot of people do. They sell Put Options as a form of trade. When you sell something in the options market, you sell it first at a high price and over time you're hoping that that Put Option value, that Put Option premium actually declines in value. That means that you're making money as an option seller. Think about it. Most people when they're invested in the market they want to buy low and sell high, okay? You buy something for 100, you sell it for 105. You know, that's the type of trade that everybody knows about. But in the stock market or the options market, you could actually do that in reverse. You can actually sell something first at a high price and then buy it back later at a cheaper price and you lock in the difference that profit in between. That's what we're doing when we sell Put Options in our newsletter is that we sell the Put Option as our initial transaction at one price and as time goes on, hopefully that Put Option value goes down and then we just buy it back at a later price and lock in the difference. So people ask me, how do you know when it's time to buy it back or when do you buy it back? Well, that's the theme of today's lesson is the 80% rule. That's when we buy the option back. So what we're gonna do is we're gonna go through what I call my cheat sheets here and let me move myself over here a little bit so we can see. So let's just kind of go through what we've been talking about. When selling Put Options, you collect the cash. When selling Put Options, you obligate yourself to potentially buy the shares at the strike price level. This is all part of selling Put Options. This is exactly what I've been saying. And when selling Put Options, you can instead buy them back, buy that same Put Option back at a profit or loss to close out the trade. Once you close the trade, once you've purchased that Put Option back, the same Put Option that you've sold, once you buy that back, you will no longer have the obligation to buy the shares anymore because you've closed out the trade. Now, down here, what's the optimal profit taking level? Well, we use the 80% rule in our newsletter. When we sell Put Option, the next goal after we initially sell it is we wait for the option to reach that 80% profit taking level. So here's the gist of it. There's a little math involved, but simple, simple math, and this is actually gonna be a pretty quick video today. So when the price of the Put Option decays by 80%, that's the signal to buy that option back and close out the trade. So let's look at some simple math here. So let's just say, as an example, we sold the Put Option contract for 50 cents per contract, okay? Our initial, it's called sell to open. We're opening the trade by making a sale. We're selling to open this Put Option for 50 cents per contract. And what we're hoping to happen is that 50 cents starts to go get lower and cheaper and lower and cheaper as time moves on towards expiration. So when that option that we just sold loses 80% of its value, that's when we look to buy it back. Now, for those of you who may never have traded options before, each option contract loses value over time. It's called time decay. No matter where the stock may go, no matter what volatility is doing, the option loses part of its value. It sheds part of its value every single day because it's marching on towards the expiration date. And as option sellers, that's what we bank on. That's what we use to our advantage to make profits. So let's look at the math here. So we originally sold this Put Option for 50 cents a contract and multiply it by 80%. That's 40 cents, okay? So when that option loses 40 cents of value, which down here would turn it into 10 cents, that's when we look to buy the option back, right here. Number three, buy option back when it hits 10 cents per contract. Starts at 50, loses 40 cents in value. That's 80% decline. Once it hits 10 cents per contract, that's when we look to buy it back, okay? So you started at 50, you bought it back at 10, that's a 40 cent per contract gain, 40 actual dollars. Every option contract consists of 100 shares of stock. So the 100 multipliers, the 100 multiplier, you always multiply the money you see here, 50 cents per contract, you multiply it by 100. That's what your actual dollars is, okay? So your gain here between the 50 cent sale price and the 10 cent buyback price is 40 cents a contract, 40 actual dollars of profit per contract. If you sold 10 contracts, your gain is $400. But remember, if you sold 10 contracts, you're on the hook to potentially buy 1,000 shares of the stock. So make sure you know how many contracts you're comfortable playing with, okay? So people will say, all right, well, now I know when to buy the option back, when it loses 80% of its value, what kind of return am I getting? I don't understand how the math on the return, what's my return? Now, one thing I wanted to talk about is, last week I talked about using a margin account or a cash account, there's something called a margin requirement, talked a little bit about it last time, whenever you sell a put option, or whenever you sell an option, your broker's going to require you to keep some of your free cash aside while the trade is active. Okay, same thing when you sell put options, you have the margin requirement and your broker needs you to keep some funds aside as the margin requirement while the trade is active. They wanna make sure you have some skin in the game that if in fact you have to buy the shares of stock at expiration, they need to know that you're good for the money and you can actually afford to buy these shares. But they're not going to have you keep the full amount of that cost of the stock on hand at all times if you're using a margin account. If you use a cash account like I talked about last week, then you have to keep the full amount of money on hand at all times. So in this case, when we sell put options at the smart option, so we use a margin account. So we don't have to keep that full cash aside. So let's just say, we sold a 50 strike put option in this example. And if we had to buy 100 shares of stock at $50, that would be a 5,000 potential cost if we had to buy 100 shares at $50 a share, that's 5,000 bucks. If you're using a cash account, you have to keep $5,000 on hand at all times. In a margin account, the typical percentage is 20% as the margin requirement, which means 20% times 5,000 is 1,000 bucks. Okay, so getting back to the question of, well, what's my return? Well, in order to figure out your return on the trade, let's just say you made the 40 cent gain, then you have to divide that 40 cents or $40 by the 1,000 margin requirement. And that equals a 4% return on margin, return on margin. It's not return on investment. Because remember, you're not investing anything. You're not laying out any money, so you can't figure out return on investment. You have to figure out return on margin. And your margin, just like I said, is $1,000. Here's the calculation in line number seven here. So you figure out your margin requirement first, and then once you've made the profit on the trade, you take your profit $40 gain and divide it into the margin requirement. That's your 4% return. Now, let's just say the trade lasted two months. Okay, if you wanna annualize your return on margin, you would multiply the 4% times six. Because even as you think if you can do this trade every two months, you can do that six times in a year. So 4% times six is 24% annualized. If you wanna extrapolate out, we know it's not guaranteed, but a lot of people wanna know what the annualized return is. So we do that calculation, all right? So really that's about it. At the smart option seller, we use the 80% rule. And typically, when the type of contracts that we sell, the 80% rule brings us usually to around five cents per contract. So when an option, the put option that we sold decays down to five cents per contract, that's when we're usually looking to buy it back. And what we wanna do is, we wanna hit that 80% rule as fast as we can. The sooner the better. The sooner before expiration, the better, okay? Why? Because once we've locked in the gain, then our margin funds are released back to us as free cash and we can jump into a new trade. There's no sense of holding on to this trade all the way to expiration if you only have a few more cents of potential profit to make. Like I just said, we usually buy these options back at five cents a contract. The option can only fall down five more cents for full profit, okay? For me, I don't think that's enough extra profit to wait another two months, let's just say, for the expiration date to occur. Because a lot of things could happen in two months, the stock could drop significantly on you and that put option value will go back up in price. So I'd rather close out the trade early before expiration once we fit that 80% rule. Now, down here, in the end, it's entirely up to you to decide when you wanna lock in your profits, when you wanna buy these options back. My 80% rule is just a thing, a level that I found over the years that works for us. Now, you can buy the option back once it's decayed 50%. In this case, it was 50 cents per contract. If it decays down to 25 cents per contract, that's a 50% decay, you could buy it back, lock in your 25 cent gain. You can take a 10% decay, 90% decay, it's totally up to you. You decide, this is your money, your thing, you can choose. Or you can just wait until expiration and if the stock doesn't make the drop, then the whole thing will expire worthless. You'll get that whole 50 cents of premium as your full gain. And you won't have to buy it back and you won't have to pay the extra commission to buy it back, it's totally up to you. Or you just hold until expiration and if the stock does fall a strike price, well, then you get a sign and you buy the shares and you're fine with that too, if that's what you wanted to do, all right? So there's really no hard and fast rule, you can take profits whenever you want or you can wait until expiration to see if you get a sign up to you. We use the 80% rule, all right? The other question I get which will be the topic of a future video is, well, what happens, this is all greatly, you know, that you're talking about the profits, what happens if the trade goes against you? What happens if the stock starts to drop and the put option value goes up? How do you, when do you take your losses or do you take losses? Or, you know, what do you look for? What's your defensive strategy? How to get out of a bad trade, all right? So that'll be in an upcoming video maybe next week. So that's really all about it. So let me scroll back up here as well. So the smart option seller, 80% rule for profit taking, all right? So easy, simple math, short video today. One other thing I wanna show you is if you go back to our website here under services tab, click on our smart option seller newsletter. This is our bread and butter. This is the newsletter, our flagship newsletter on selling put options. You can read through the description here and see the chart and other things and testimonials, so if you wanna get, you know, take a look at the newsletter, please do. The other thing is we have our one-on-one coaching and we also have our other put option credit spread newsletter if you wanna take a look around. All right, well, you know, that's all for me today. Short one, I hope it's been helpful. Please give me a thumbs up in this YouTube video. Don't forget to subscribe, leave me a comment if you wish, send me an email. I always answer emails. And that's all I have for today. So I hope everyone has a great weekend and a great trading week ahead. This is Lilo signing off.