 Hey everybody, Lee Lowell here, smartoptionseller.com. How's everyone doing? I've got another options education lesson for you today. This is what we do here in these YouTube videos. I've been in the business for 30 years, so I'm trying to help you become a smarter, more profitable options trader. So we, or I like to try to give you these videos that can help you in certain areas of all facets of options trading. I get lots of questions every week, asking me to make videos on particulars about trading options, whether they're buying options, selling options, how to make a trade, what's volatility, what's the margin requirement, how do I do a spread? So I get all these questions. But so today in this options trading video, we're going to be talking about taking profits or how to take profits, when to take profits on an option that you have sold. Here at the smartoptions seller, this is what we do. We sell options as our initial trade. We don't typically buy options all that much. We're always on the selling side of options. Now remember, option trades always have a buyer and a seller. We typically are on the selling side of options. In the financial markets, you can sell something whether you own the contract or not. Same thing with stocks. You can sell a stock before you even own it. It's called shorting the stock or shorting the options. You're taking a position from the short side, not that you're bearish. It has nothing to do with directional opinion. It just means you're selling the contract instead of buying it. So in this case, we're talking about when you can take profits when you sell a put option contract. Now that is pretty much our bread and butter here at smartoptions seller. So we sell a lot of put options. And I get questions from people, well, if I sell the option, like how do I get my money or when do I take profits or how do I take profits? It's a great question because it can confuse a lot of people because most people always think about, well, I buy something first and then I sell it at a higher price. Well, how do I make money or how do I lock in my gains when I sell an option? I'm just not sure I understand how that works. So let's take a step back and talk about what happens when you sell an option. We'll talk specifically about selling put options because that's what we specialize here. So when you sell a put option, what you're doing is you're selling the contract to the put option buyer. And in exchange for you selling that contract, the put option buyer pays you money upfront. Now, I just wanna do a little refresher here before I talk about how to take profits. When you sell an option contract, whether it's a call option or a put option, the maximum gain or the maximum profit you can ever make on that put option or call option is for whatever you initially sell that contract for, that option contract. So on day one, when you sell that option contract for whatever price you sell for, that is the maximum amount of money you can ever make on that trade, okay? So here in my little example, if you sell that option contract for $1 per contract, which in actual dollar terms, that's $100 because every option contract consists of 100 shares of stock. So you always have to multiply the option price times 100 and that'll tell you how much money you will receive. So if you sold an option for $1 per contract, you will immediately get $100 in your account. And that's the maximum that you can ever make on that option contract, okay? $100, it's the maximum you can make. And what you're doing is you have to wait until expiration to fully yield that $100. Even though you get the $100 right off the bat, your broker will put a hold on that money, a partial hold on that money until it either expires worthless or you actually buy the option back and lock in a game. So let's just talk about what we can do here. So you sell an option contract, you collect the money and now that money's sitting in your account. And what you can do at that point is that you wait to see what happens. Now, typically as an option seller, what you want to happen is that you wanna see that option price go down in value, okay? If you sold something for $1 per contract, you actually want the option price to go down, not up. Why do we want it to go down? Because if the option goes from $100 downwards, that means you can eventually, if you want to, buy it back for a cheaper price and lock in a game. That's how you make money when you sell options, okay? You sell it at a high price and you try to buy it back at a lower price. It's just the reverse of buying low and selling high. In the option selling world, what you're doing is you're selling high first and then you're trying to buy it back low as the second part of the transaction, okay? That's how you lock in a game. Even though you've gotten $100 right off the bat, it's not a full game yet. It's not a full $100 locked in until or unless you close it out early or you let it expire worthless on expiration date. Okay, so that's, we have a little refresher there on how selling options works. Now, I get questions, well, can I take profits before expiration date? Do I have to hold the option till expiration date? What if I wanna lock in my gains or lock in a loss and move on to something else? Well, let's talk about what I call my 80% rule when selling options. What is the 80% rule? Well, in the case of selling options, let me scroll down here a little bit. Like I said, you sell something at a high price, your goal is to buy it back at a cheaper price. Before expiration, the faster that you can lock in your money, the better because the less time that you give a stock, the chance to move around wildly, the better. You don't wanna stock to move around a lot when you've sold an option. When you sell an option contract, specifically a put option contract, you want that stock to either stay flat or go up at price because that's what will make the option price go down. Okay, so there's a couple of things you have to understand. When you sell a put option, it's good for the stock to move up. Okay, that moves in inverse. Stock goes up, put option values go down, and that's good if you're a put option seller. That's what you want to happen. So the 80% rule states that once an option value has lost 80% of its value, that's when you would look to buy the option back and lock in your gain. So let's talk about that. Let's look at an example here, okay? So the 80% rule states once you've captured, meaning the option has decayed or lost 80% of its original premium, it's smart to buy the option back and lock in the game. So let's look at an example of, we sell a three month put option for $1 per contract. We get the $100 in our account, and now we have to sit there and wait to see what happens to the stock. We have to see whether the stock drops or stays flat or goes up. But we're banking on the time decay factor of options. What is the time decay factor? Well, every option loses a little bit of value every day due to the passage of time. Okay, we don't have to do anything else as an option seller and that option will lose value just because it's passing time moving towards expiration. That's a great thing for us. We really don't have to do anything to make some money. So as time marches on, that option that we sold for $1 per contract starts to lose its value and it goes down, down, down. What we're looking for is for when that option is now worth $0.20 per contract, okay? So two months later, the option is worth $0.20 per contract. It started out at $1 per contract and now two months later, it's worth $0.20 per contract. And that's a great thing. That option has lost or decayed 80% of its original value. It went from $1 down to $0.20 a contract. Now it's worth $20. Sold at $100, now it's worth $20. Now you have a paper gain of $80 per contract. If you sold 10 contracts, that's an $800 gain, depending on how many contracts you've sold. So it's really smart. In my book, the 80% rule is that once the option has lost 80% of its value, you look to lock it in. How do you lock it in? Well, you just have to buy that same option back. Whatever option you sold, you're going to buy back that same specific option at a much cheaper price, okay? So here we go. You're buying it back will cost $0.20 per contract, which is $20, which will lock in a win of $80 profit per contract. Sold at $100, buy it back at $20. The trade is over and the position will disappear from your account. Now the question is, why is it smart to buy back the option after it loses 80%? Why don't we want to wait for it to decay to 100%? Well, that's fine. You can do that. But anytime that you can buy something back where you've locked in 80% of the full profit, before the expiration date, the better. Because just think about a stock that, let's say you're holding an option position over an earnings announcement and all of a sudden the company has horrible earnings and the stock drops on you the next day, the next day in the market. That put option value is gonna skyrocket back up in price most likely. And now you're like, oh, I just gave up all my paper profits and now potentially I might have to buy that option back for a loss. So it's always smart in my book to, if you can lock in 80% of the gains before expiration, you do it. Because then you could take your money and move on to the next trade. What money are we talking about? Well, when you sell an option, your broker is going to assess you what's called a margin requirement. And what's the margin requirement? That's just money in your account, liquid funds in your account that has to be held aside while the specific trade is open. Okay, how much money are they going to hold aside of your free cash? Well, that's called the margin requirement. And most brokers today will hold roughly somewhere between 10 and 20% of what it would cost to buy that particular stock, 100 shares of that stock at the strike price. Now, in the example, let's just say we're looking at a $50 strike price. And if you had to buy 100 shares of that stock at $50, it would cost $5,000 total investment. Well, out of that total investment, your broker is going to hold aside 20% of that, which is $1,000. Okay, so in order for you to sell that put option for $1 a contract, your broker is gonna say, okay, well, yes, we're giving, you're gonna get $100 when you sell that contract. But while the trade is open, we still have to hold $1,000 of your free cash aside as the margin requirement until you close out the trade. And when you close out the trade, we will release the $1,000. So I always get, well, what's the, what's my return percentage? How do I figure out how much money I've made when I've sold this put option? Well, you have to figure out what's called return on margin, R-O-M right down here, right? Return on margin, R-O-M, it's not return on investment because you're not buying anything, you're not investing any money. So you're not figuring out the usual return on investment. This is called return on margin, okay? So if you have a $1,000 margin requirement and you make $80 profit, okay? Remember, you sold it at 100, now you bought it back at 20, you locked in $80, okay? So that's your profit. Well, what's your return on that profit? You take the 20, you take the $80 gain and you divide it into the $1,000 margin requirement. And that equals an 8% return in two months time or 48% annualized, if you like to annualize, okay? So the margin requirement is very dependent on what strike price you use. The higher the strike price, the higher the margin requirement. You're here at the smart option seller and when we sell put options, we try to stick to stock or strike prices at $50 and under, okay? Because it's a little bit easier on the wallet when you sell these put options. So your percentage return is your dollar gain divided by the margin requirement, okay? So the whole goal of this little lesson here today, this short lesson is how to take profits, when to take profits and why to take profits. And in my book, once you've locked in 80% of the maximum gain you could make, it's time to take those gains and move on. You'll have your margin money released and you could make a new trade and try to capture 80% on the next trade. Now, if you wanna hold it until expiration, that's fine with you. You can hold out for a 90% return or even wait until the option expires and then you'll get 100% return and you won't have to pay an extra commission to buy the option back. For me, I like to get in and out. When I've captured 80%, that's good enough for me. I'll move on to another trade but it's entirely up to you to decide what you wanna do. Okay, so there you go. That's your little lesson today on an idea that you can think about of when to take profits, when you've sold a put option, okay? And if you wanna learn more about put options, let me just bring up our website here real quick, smartoptionseller.com. Get a free copy of our Put Selling Basics. Go to our website, click on Put Selling Basics and scroll down to the bottom. You can put in your name, email address. This free Put Selling Basics guide talks all about how to sell put options and there's a good section on the margin requirement if you wanna learn a little bit more about the margin requirement. Okay, so that's it for me today. I hope this short little lesson has been helpful to you and just remember, we like to take profits. We like to get in and out. We don't like any surprises by stocks dropping during earnings. So that's why we lock in our gains at 80% when the option has decayed 80%. All right, that's all for me today. I hope everyone has a great weekend and I will see you all here next week. This is Lilo signing off.