 Hey everybody, how's everyone doing today? This is Lee Lowell from smartoptionseller.com. Today is Saturday, December 5th, 2020. Welcome to another edition of our Saturday Synopsis. We look at the charts, see what happened over the last week, and see what may be going forward for next week. We also look at some options information. So for this week I've been getting questions from some of my readers, some of my students, wanting to know a little bit more about option credit spreads. It's one of the things we do at Smart Option Seller. We sell put option credit spreads. So I get a lot of questions, mostly asking about what happens if the stock finishes in between the strike prices at expiration. And this is good for whether you're selling put option spreads, call option spreads. If you're a buyer of the spreads, it doesn't really matter whether you're a buyer or a caller of option spreads. There's always the chance that the stock can finish in between the strike prices at expiration. So I get a lot of questions. What do I do? What happens? Will I get assigned early? Do I have to exercise? What happens? So today we're going to talk about that specific scenario where the stock actually finishes in between the strike prices. So let's get right to it. Let's go to our cheat sheet that I always open up and you can always look back at this if you want to replay the video. So you don't have to get it all now and take a screenshot of this thing. So you can always rewatch this. So let's talk about selling put option credit spreads because that's what we do with the smart option seller. But it all applies the same thing whether you're a buyer or a seller, whether it's call spreads, put spreads. So let's go over what actually happens here. So let's just say we want to sell a put option credit spread. And when you sell a put option credit spread, you're selling a put option at one strike, a higher strike price, and you're buying a lower strike put option against it as a form of protection in the same expiration month. And typically you would use the same amount of contracts. You can sell five spreads. That means you sell five of the high strike and you buy five of the low strike. So you want them to match up because otherwise then you'll have an uneven position and that can open you up to unlimited risk. So you always want to have the contracts at the same amount and use the same expiration month as well. Okay, so let's talk about selling put option credit. But here's the example. Let's just say the stock is $100 a share and you want to sell a put option credit spread, which is a neutral to bullishly directional type of trade. The way that the way that we do it at smart option seller is that we sell out of the money put option credit spreads, which means the stocks here, we use our strike prices down here. We like to give ourselves a buffer for downside movement in case we're wrong on our directional assessment. We like to have a little bit of leeway, a little bit of comfort level, a little buffer. So in this specific case, the stocks at $100 a share, and we're going to sell the out of the money put option credit spread. And that means we're going to sell, this is just an example, we'll sell an $80 put option, and we'll buy the $75 put option as protection. That's a $5 wide spread. You got 80 and 75. That's $5 in between. So that's why we call it $5 wide. And we when we sell that put option credit spread, we collect $50 50 cents credit 50 cents per spread, which is actual $50. Okay, this is just an example. This is just numbers that I'm used to trading for our readers. Okay, so when you sell the 80 put you're going to sell the 80 put and you're going to buy the 75 put. It's your $5 wide put option credit spread, and you're going to receive 50 cents per spread. If you sell five of those, you're going to collect $250, right? So in this case, we want to talk about what's the max profit? What's the max risk? What's the break even? And what happens if the stock finishes at all different levels? We'll go over that in each scenario. Now, obviously, if you know, or your experience with selling option credit spreads, you know your maximum profit is whatever credit you receive when you first sell the spread. So we sold the spread this fictional spread for 50 cents credit. So the maximum risk we can ever I mean, I'm sorry, the maximum profit we'll ever make for this spread is 50 cents per spread. And that's 50 actual dollars. So you sell one spread, you're going to get $50 for this trade. Your max risk, on the other hand, is $450 credit in this, in this example. Okay, that's your maximum risk. That's $450 actual dollars. And the way that you calculate the risk is that you take your credit that you received your 50 cents and you subtract it from the width of the spread. Okay, the width of the spread is $5 and you subtract 50 cents from that. And now your maximum risk is $4 and 50 cents, or $450 actual dollars per spread. So you're basically collecting, you're collecting $50, and you're risking $450, right? And you might be saying to yourself, Well, why would I want to risk 450 just to make 50? Well, that's where the probability of profit comes into play. And I've talked about this in other videos. When you sell out of the money options, whether it's out of the money, you know, single options are out of the money spreads, your probability of profit is going to be very high. And in order to get that, you have to give up something. So you're giving up more gain and taking on more risk to get a higher probability of profit. So in this case, your maximum profit can be the $50 and your maximum risk is the $450. And like I said, you calculate that by subtracting the credit received from the width of the spread. Okay. So the question comes down to, okay, well, where does the stock have to be for me to either make the maximum gain or to endure the maximum risk or the maximum loss. And that's where the stock price comes into play. Now, when you sell put option credit spreads, it's a neutral to both directional play. So you actually want the stock to either stay flat or move up. Okay, so in this case, the maximum profit is achieved, meaning that we'll get to keep the full $50. That's that's the goal in when you're selling option credit is that you want to keep the full credit that you received from day one. So the maximum profit will be achieved if the stock stays above $80. And that's the short leg of the spread, you got two legs as we call them, they're called legs, you got your short leg and your long leg. And the $80 strike is your short leg and the $75 strike is your long leg. What you want the stock to do is remain above the short leg. That's the goal. When you sell put option credit spreads is that you want the stock price to stay above the short leg. Okay, so in this case, that would be the max profit will be achieved if the stock stays above $80 a share. The maximum loss, the maximum risk will be achieved if the stock finishes below the long leg, which is $75. So you will take the maximum loss or have a maximum risk in this case, if the stock finishes below $75. That's your long leg of the spread. So if the stock's at 100, you're going to take a maximum risk if the stock falls all the way below $75 a share. That's a pretty solid move. That's a $25 move. That's that's a big move. So you want to make sure that you're picking stocks that are in a nice uptrend that looks to be continuing in that uptrend. And you don't want to pick stocks that are in a downtrend because that means it just there's a higher chance that the stock could fall below your long leg. So once again, the maximum risk that will be achieved or the maximum loss will be achieved that the stock finishes below $75. That's your long leg. So the question that I get a lot is, well, what happens if the stock finishes in between the strike prices at expiration? That's a great question. And I get that all the time. So let's just say the stock finishes at you know, $77 a share that's in between the long leg and the short leg, right? You got $80 $75 and the stock finishes at 77. Well, what happens? Well, in that case, it all depends on what you originally sold the spread for will determine your, you know, your you could actually have a profit or a loss in that case. It all depends on what you sold the spread for. But let's look at an example here. Now you always need to know what your break even price is. Okay, there's you always need to know where the stock can move to in order for you to break even to figure that out. You have to take the short leg of the spread, which is the $80 strike and subtract the credit received, which is 50 cents. So we got 80 minus 50 equals $79 and 50 cents. That is your break even price. So if the stock falls from 100 down to 7950, now you're break even and any stock price below 7950, you will start to accrue losses in the trade. Okay, so just remember, you always want to make sure you know what your break even price is before you get into the trade. And that is the short leg of the $80 minus the credit received. So 7950. If the stock's currently at 100, you've got a $20 and 50 cent buffer $100 down to 7950 is $20 and 50 cent buffer. So you you're hoping that the stock, you know, doesn't fall that far. You want it to stay above 80, regardless. But if it falls down to 7950, that's your break even. Okay, so you need to know your break even, you need to know what the maximum risk is. And you want to make sure you know what the maximum profit is. Those three numbers are very important. Now, the question was what happens if the stock finishes at let's just say $77 a share, you know, or what happens if the stock falls to $77 or even further before expiration? The question I get a lot is will I get assigned early? Will I have to buy the stock before expiration? If the stock falls in between the strike prices? Now, in the options world, typically 99.9% of options contracts in the money options contracts will not get assigned or exercise early, because there's no reason to do that. They just you will be giving up the the buyer of that option. If they exercise early, we'll be giving up what we call the time premium profits, the extra time premium profits. And if you don't understand what that means, watch my video from September 12 2020 right here, September 12 2020. I put out a video about is it better to exercise your options early or sell it or hold on to it. So it's a very it's a very important concept when trading options is that if you exercise an option early before expiration, you will be giving up some profits, you will you will be leaving money on the table and you might not understand that right from here. So watch the video from September 12 2020. But anyway, so the question is, you know, what happens if the stock finishes in between the strike prices before expiration? Am I going to get a sign on my short leg on the $80 puts in this case? Well, I have to buy the stock at $80. The short answer is no, most likely not because most option players should be smart enough to know that you shouldn't exercise your option early because you know what if the stock falls to 77 and then the next day it shoots back up to 85, let's say, you know, you don't need to exercise your option before that time. So most option players will wait until expiration to before they exercise any in the money options. And since you are long the 75 put, that's up to you the buyer of the option is the one who gets to choose when to exercise the option. So if you're long the 75 puts, that's up to you, you can you decide when to exercise it. But what I'm telling you is it's not smart to exercise it before expiration. And the $80 puts which is one that we're short in this equation we're short the 80 put, we're at the mercy of the option bar. So we have no control over that. But what I'm telling you is that 99.9% of the time in the money options won't get assigned before expiration unless unless it's just, you know, a sheer extreme move. So let's just say the stock dropped from 100 all the way down to $1 share. Well, in that case, most likely, the option may get assigned on you early, but those extreme cases are very rare. So anyway, so you have to know that let's just say the stock finishes, let's say the stock finishes on expiration date at $77 a share. Okay, well, then the $80 put will get assigned. And the 75 put will expire worthless. So that is a $3 that is a $3 contract price for the 80 put if the stocks at 77 that 80 put is now worth $3. And you would have a $3 per share loss minus your 50 cents would actually be a $2 and 50 cent loss. Okay, so my my advice is if the stock looks like it's going to finish in between the strike prices, and you're not willing to buy the shares at $80, you just unwind the spread, just buy the spread back before expiration. And by doing that, you're closing out the whole position. In that case, you're buying back the 80 puts, and you're selling out the 75 puts, you're just reversing the whole trade. So if it looks like the stocks going to finish in between the strike prices, and you're not willing to be assigned on your 80 puts, that means you'd have to buy 100 shares at $80 a share. That's an $8,000 investment. If you're not willing to do that, then you just unwind the whole spread, buy the whole spread back for whatever the prevailing prices. In this case, let's say the stocks at 77, that spread would be worth $3 now. Okay, you sold it for 50 cents. Now you have to buy it back for $3. That would be your $2 and 50 cent loss per spread. That's $250. Just like I said, so you buy the whole spread back for $3 per spread, and the trade would be done. You don't have to worry about buying the shares at $80 a share. It's just unfortunate that the stock had to fall to that price at expiration, you know, went from 100 down to 77. It fell $23. You know, what can you do? It just went against your prediction. So you buy the whole spread back, you close it out, and you're off the hook for everything. But the other question I get is that, well, what happens if the stock falls to 77 before expiration? Well, this is what I'm talking about. The price could always pop back up. You know, so most likely you're not going to get assigned early before expiration, just because the stock happens to fall below your short leg or even below both legs before expiration, chances are you will not get assigned early. And your your long leg, let's say the stock falls to $70. Okay, you're still in control of when you want to exercise your in the money option. The only time the in the money option gets automatically exercised by the broker is on expiration date. Okay, so you don't have to worry about your broker exercising it on your behalf before expiration day. That doesn't happen. So if the stock drops in between the strikes or below all the strikes before expiration, you know, there's there's a very minimal chance that you will be assigned early. So you don't have to worry about that. But there's you know, there's always that point 1% chance that that it could happen. So you need to be aware. All right, if you're getting nervous about it, and it's getting close to expiration, and the stock is dropping and it's in between the strike prices, you might want to consider buying the spread back. That's just how it is. And you buy it back, and you may be able to take a gain on it. Let's just say the stock, let's just say the stock is at 100. And you sold the spread for let's say, you know, lucky enough to sell it for $2 per spread, when you when you originally sold it. Well, what if the the the stocks at $79.50 a couple days before expiration, well, you can always buy it back, probably buy it back for, you know, 75 cents of spread, and you'd actually make money on it. If you sold it for $2 and you buy it back for 70 cents, you got a $1.30 or $130 profit. So it all depends on where you originally sold the spread, and where the the stock is at that moment in time in between the prices, the strike prices. So there you go. That's that's your lesson on, you know, what happens when you, you know, when you trade these things. Let me show you a good website that that could help you look at this thing visually. Not here. This is our website. Give me a second here. Move this out of the way. And I'll show you a website and I've shown this website before. Let's move this out of here. Get up this website. Hang on. Okay, we've got this website, option creator.com. And I've mentioned this website in the past, option creator.com. It could help you visually see any spread or single option trade that you want. Okay, you can go up to the top here. And you can pull up any kind of option strategy you want. Click the down arrow. You can go through all these things. So we have the we have a spread that's already already up here on the screen. So you can buy or sell you can put in your your prices. And this is what a put option or you know, any option credit spread has this shape. And let's go to days expiry is zero days left. And so this is will show you the profit or loss. This is a profit and loss chart. And it's just visual representation of what happens to your trade you have a maximum risk and a maximum reward. And you can get somewhere in between depending on the price of the stock and where you are on the expiration day scale. So that's a good, it's a good website option creator.com. Okay, so that's all for the the option credit spread break even maximum risk, all that you know you want to make sure you know what your break even prices. That way, you'll understand what your maximum risk can be what your maximum loss can be. And also, like I said, if the stock finishes in between the strike prices, either before or at expiration date, you know exactly what's going to happen. So let's move on to our second part of a video, which is our Saturday synopsis, we'd like to take a look at the charts, see what happened over the last week. And I'll look at some individual stocks to to give you my assessment on what I've seen over the last week. So we always start with the the broad market. Let's open this up here. We look at the S&P 500, as it's represented by the SPY, which is the Exchange Traded Fund for the S&P 500. Things are looking good, right? If you've been watching my videos over the last week, we've been talking about the market going up. The S&P 500, here's where we finished yesterday. This is a daily chart. We always look at the daily chart. Each bar is one day's worth of trading, finished on the highs. You see this little tick mark on the on the right side of this bar? That means that's where it closed for the day. And it closed right on the highs right around just under a tick under $370 per share for the SPY. That's 3,700 on the S&P 500 itself. All time new highs had a great week. We had talked about this for weeks now. We have the nice W bullish pattern. We've been talking about the S&P 500 needed to convincingly move above the resistance line right here, the blue line. And we'd also drawn this congestion triangle right here. We're waiting for it to move out. And this the past two weeks, this week especially, look at this solid move higher. So the S&P 500 strong stocks are strong. Things are looking good for the market. We've had some movement on the coronavirus vaccine. That's also pushing the market higher. Everyone's optimistic about the future, getting everyone on this vaccine so we can get back to a more normal life. Obviously, the coronavirus cases are still going up, which is unsettling. But you know, the vaccine is starting to come out. So the market always looks ahead to future days being more optimistic. Here in the US, our Congress is trying to get more stimulus money out to people and businesses. So just the talks are getting people excited, having the talks about a possible another stimulus package. So that's getting people excited and being more bullish about the market. So S&P 500, all time new highs again, had a good week. It looks strong. It looks strong here. Now there's always a chance for a pullback. Okay, if you've been missing out and you didn't get in yet, you can always wait for a pullback because there's always going to be another pullback. At some point, the market's going to pull back. You can wait for it to pull back to the 20 day moving average or 50 day moving average. These are the ones I have in my chart. You know, don't feel bad. You know, wait for a pullback and then you can get in. Let's take a look at the NASDAQ composite. This week was a good week for the NASDAQ finally moved up convincingly out of the ascending triangle that we had talked about. Okay, we have the resistance line here. So here we are this week looking strong popped out above it. You know, I've been bullish. I've been talking about being bullish for the last few weeks here. And the market is is going well. It's moved up. So you got all this, you know, free free space up here. I mean, the market can just keep going up at this point. We blasted due to resistance. Maybe we'll have a pullback to the 20 day moving average line, which is up sloping. So you got the 20 day moving up, maybe this will come down so it'll meet somewhere in between. And if it does, you know, that could be your your next entry point. So market looks good. Let's take a look at the Dow industrials. Dow has been strong too. Okay, let's move this down a little take a look. Dow strong. It's been above the resistance line for weeks now another new all time high you can see right on the right side of the bar the tick finished on the highs all time new highs I had this little triangle right here. And now it's blasting out above it. So all three indexes look really strong. I mean, there's really nothing to hold this thing back at this point other than normal profit taking if we get if it gets sold off, it's mostly due to just normal profit taking it doesn't mean it's the start of another bear market people email me all the time, Lee, what you know, what do I do when we hit a bear market? Or, you know, what's going to happen when the next bear market hits? Well, why is everyone so convinced that there's going to be another bear market? You know, governments around the world keep stepping in and, you know, lowering interest rates backstopping everything I don't see why people are so convinced that there's going to be another bear market. We have pullbacks that is not the normal gyrations of the market you will have pullbacks but it doesn't mean that it's time to sell out of everything and say, okay, the next bear market is here. Wait for your pullback. The market has got the momentum behind it's got the bullish momentum. I'm long here. I'm bullish. This thing is going to keep going up. Pullbacks happen. Okay, that's just another entry point to get long again. Just remember, long time, long time averages over the long term. Let's let's like that a monthly chart of the Dow. Things go up over the long run. If you're in for the long haul, you're you just, you know, you could hold on and wait. Yes, we have pullbacks, but look how fast look how fast the pullbacks get bought back up again. Okay, 2008 2009. This looks so minuscule now over the looking back. Yes, we will have pullbacks, but it doesn't mean it's the next bear market. Let's take a look at some individual stocks and see what's happening. I want to point out, you know, these price patterns, these chart patterns. Once again, it's all about looking at charts and spotting these patterns. Okay, these are these are things that are going to help you spot the next move. So let's take a look at a couple stocks that I had wrote down for this week. So let's take a look at Caterpillar to start Caterpillar, you know, is a Dow industrial store stalwart. And if you follow the moves, look at this beautiful uptrending pattern, how it bounces perfectly, either off the 20 day moving average or the 50 day moving average. These are very important moving average lines people the 20 day and 50 day, everyone looks at these things. So everyone, it's, it's like a self fulfilling prophecy. The stocks and indexes bounce off these numbers pretty good. So if you have the 20 day was the blue line 50 day is the red line on your charts and this is the 200 day, the long one, you can see how the stock bounces off these averages. So every time that you get a pullback is is an opportunity to get long, if that's the stock that you're interested in. Okay, so, you know, back here, you can say, Okay, well, this is the top it's not going any higher. Well, once again, it bounces. Well, this is the top it's not going any higher. Well, it bounces again. So you follow the momentum you want to follow these strong stocks. The only time it's not going to go up is when convincingly falls below the moving averages and starts a new downtrend. So here, new all time highs for Caterpillar. See how it was going a little upwards to sideways until it met up with the 20 day moving average. And then look how look at that perfect bounce. Okay, Walmart had a very similar or has a very similar pattern right now. I want to bring this up to you. Here's the coronavirus meltdown in March. Walmart's been a very good stock. It's been bouncing. Look how just like Caterpillar it's bouncing either off the 20 day or 50 day. Right now here it goes. It has a nice pullback. It's falling below the 20 day still above the 50 day. So if you're if you want to get long Walmart, if Walmart's in your sights, look at the moving averages, you can either wait to see if it falls down to the 50 or if it starts turning up again, you know, the next leg is probably have started. So you can you can, you know, scale in here, wait a little longer. If it falls back to here, scale in and wait, see, see where it goes. If it bounces, then you know it's going to keep going up. Let's take a look at some other of our favorites. We have AMD, which I wanted to show you. We always talk about AMD. AMD has been a great stock for us. Had been bouncing off the support line. Now, AMD is making the or has made the W pattern that we talk about. I've shown you these W patterns. Let's draw it in here. You got the W and once again, drawing these things is sometimes manual labor. So let's edit these things so we can see it a little bit better. Okay. And it's good to try to spot these things on charts. Whenever you're looking at charts, you want to look for patterns like this. The W pattern is a very bullish pattern. And if you spot it on the daily chart, that's what we look at on the daily chart, you know, you've got an opportunity to potentially get long and ride it up for good profit. So here we go. AMD, W pattern. And let's draw the the resistance line at the top of the first W leg right here. Okay, make this thing nice and flat. Okay, we'll blow this up a little. Okay, one more. Okay, so there you got your W pattern. It ticked above it just just ever so slightly during the week up here. So it's right on the resistance line popped down below yesterday. So if AMD starts to pop above this resistance line, it's off to the race. It's got a nice W pattern. Once it gets above here for a couple days, look for AMD to continue its move higher. Let's see what other stocks I've got. Cisco, Cisco, the food company Cisco, not the other Cisco. This is SYY Cisco had this nice triangle pattern right here congestion storing up all the energy waiting for it to move either higher or lower. The your the odds are where it came from came from down below. So it has the upside momentum to it just coiling up for that next upside breakout and look at what happened. Finally broke out just on Thursday and Friday finished that finish on the highs on Friday yesterday, December 4th. So look for these patterns on the charts people they work. Okay. What are what are Intel Intel? I want to show you we talked about Intel. I like AMD better than Intel but Intel had this nice move this week and you know why? Here it is. Here's another W pattern right here. Okay. If you if you were watching Intel you might have seen this W pattern right here with the resistance. Okay. So there's your another W pattern and when it makes it on the lows it's even stronger. So it broke above like 48 and a half and it just gained almost four dollars a share. Wants to close this gap right here. It had earnings announcements and it dropped it down. First it made this W pattern went above like it should have and then earnings dropped it made another W pattern and it's going back up again trying to fully close this gap right here. So keep an eye on Intel made the move probably going to try to shoot for the the 200 day moving average here which will probably add a lot of resistance. What else have we seen? Tesla we always like to look at Tesla. Tesla has just been a monster. Okay. We've had this triangle pattern on the chart for weeks now and it just blasted higher. You know coiling a little here congestion here waiting for the next move higher. I mean it's it's it's gone a pretty good you know Tesla. I really don't have anything to say about it except that I like to look at the chart how it blasted out of here. Just to show you that these these these patterns work. I can't say whether to get long or short here but you know people love Tesla so most likely the path of least resistance is still higher. Netflix and Netflix is still churning in this this this pattern here but it was it's it's around it's 20 day and 50 day moving average. I like it here. I like the the bottoming pattern here. I have a feeling it's going to move back up towards the top end of the range but it's still coiling right here. It hasn't decided what it wants to do so I'm hoping next week we'll start to see it move up. Apple same thing. Apple had the triangle pattern blasted out finally over the last week. Not as convincingly yet. Still deciding you know do I want to go higher or do I want to still kind of stay congested here. So Apple definitely has moved out of the triangle but maybe coiling up again for the next leg higher. I want Apple to go higher in all disclosure. I'm long shares of Apple. Long some call options so I want this thing to go higher. Amazon we've always looked at Amazon too. Amazon still coiling in this pattern. This triangle pattern right here. You know it's probably got a little bit more room to run in here but hoping that it's going to you know move one way or the other hoping to the upside. What else we got and Costco I want to show let's take a look at Costco here. Costco another one of these these nice uptrending stocks bouncing right. It finished yesterday right on the 50-day moving average. If you are someone who wants to potentially get long Costco you know take a look here. Let's see if it bounces because this could be a great entry point for getting long Costco. You know odds are it's going to bounce again so keep an eye over the next couple days. The next couple days worth of trading will tell you whether Costco wants to go up or down. All right so that's it for the assessment of some stocks. Our Saturday synopsis. Once again let's take a look at the SPY. Make sure we're all on the same page here SPY. Just looking strong same with all the indexes. I really don't see anything holding this thing back so you know for me personally I'm staying long right now until I see otherwise and if we do get a pull back it's for me it's not it's not the beginning of a bear market it's just a normal pull back and it could be a better or another opportunity to buy. All right so that's it for the for the synopsis. Let me bring you to our website one more time just so you can see what's happening. We go to smartoptionseller.com. Here's our website smartoptionseller.com. Get a copy of our free put selling basics guide if you haven't already. All you have to do is put in your name and email in the box you'll get free copy if you want to know more about what we do just click on our services tab we've got our two newsletters and our one-on-one coaching. I hope this information is helpful for you to give me a thumbs up in the comments down give me a comment down below give me a thumbs up don't forget to subscribe hit that red button in the bottom right hand corner of the video send me an email I will always answer. All right that's it for me have a great weekend everyone this is Lee Lowell signing off.