 Hey, what's up everyone? Lee Lowell here from smartoptionsell.com. How's everyone doing today? It is Saturday, January 21st 2023. We're back for another edition of our free YouTube options strategy videos. We're gonna we're gonna carry on with the the put selling Tutorials that we started last week for 2023 are bread and butter, which is selling options mainly selling put options So I'm making these new new videos sprucing them up getting them refreshed for 2023 Not a lot of new information because the strategy really doesn't change But you know, I like to like to make these new videos. So we're moving on here We're selling put options if you didn't see our video from last week Please go back into our YouTube channel here and look for the video from last week I'll actually put it on at the end of this video. You'll see it'll pop up on the screen there So you can just click on it and watch last week's video if you didn't catch it So we're talking about selling put options and in this week's video as we do I like to give you these this free information Use some of my 30 plus years in this business We're gonna be talking about what kind of account to sell these put options in should you be using a cash account or a Margin account when selling put options. What's better? What's the difference between the two? So we're going to talk about that for a little bit But before we do that as you know at the smart option seller calm We're all about selling options. We're all about selling put options. That is our bread and butter So please do yourself a favor go to our website smart option seller calm and get a free copy of our put selling basics E-book right here this thing right here right in front of you go to our website Click on the put selling basics header at the top scroll down You could read a little bit more about the the description and then put your name and email address in here We will send you an email that contains a link for the free copy of put selling basics is all about why we love selling put options What makes it such a great strategy and why I've been doing it for 30 plus years with a lot of success So do yourself a favor get that and and once you're done doing that look at some of our services here We got our smart option seller newsletter a vertical spread trader newsletter These are our paid newsletters that we have and the way we are we have our one-on-one coaching if you need a little help Getting to that next level of your options trading skills. All right, so let's go on back to our lesson for the day and In this PDF here, I have the cash account or margin account for selling put options. What is the difference? Why would you want to use one over the other so let's discuss each one So if you remember or if you know if you're just new put selling is all about Selling a put option contract to the other party, which is the put option buyer And when you sell a put option contract, you're actually doing two things number one You're getting cash right up front for the sale of that contract and number two You're actually obligating yourself to potentially buy a stock of your choosing at a price of your choosing sometime in the future So as I mentioned last week in last week's video if there's a stock out there that you that you would like to buy But not at its current price You want to try to buy the stock at a cheaper price because you want to get a better deal on that on that stock You can sell a put option Using a strike price at a level where you would be comfortable potentially buying that stock So the example we gave you know the stocks at you know $100 a share and you don't want to buy it at its current $100 share price You can sell a put option contract that say the $70 strike Which means you're obligating yourself to potentially buy that stock at $70 not $100 But at $70 if and only if the stock actually falls from 100 to 70 within the expiration period So you're giving yourself $30 a buffer right there to potentially buy that stock You may not end up buying the stock because the stock has to fall that far Within the expiration period for you to buy that stock But in the meantime in the meantime while you're waiting for that stock to potentially fall $30 Someone is paying you for your time and effort That's what happens when you sell an option Someone pays you money for that option. Basically what you're doing is selling insurance to somebody on their holding So if they had bought the stock at 100 and they want to get out of that stock by selling it at 70 You're going to be there to take that stock from them to buy that stock from them That that would be called you would be getting put the stock At $70 that and and the process is called getting assigned. All right, so When you sell a put option you're on the hook to potentially buy the stock and I say potentially because there's no guarantee It'll happen But what is guaranteed is that you will always get the premium the money that the option buyer has to pay you You will get that and so that's an income stream that you can have over time If you sell these put options with a lot of cushion in between these strike prices You can just continuously make this money without ever having to buy the stock So that's one way that people You know create an income stream for yourself But if in fact you really do want to buy the stock well Then you know you hope that the the stock price falls and then you'll get to buy the stock but In order to make those transactions you have to do it in in an options account an options trading account And you do that with your broker now a broker offers two kinds of accounts a cash account And a margin account and the difference is and right here just kind of scrolling along looking through what I've wrote here a cash account which is also called selling cash secured puts means that You will have the the full cash on hand at all times if and when you have to buy those shares of stock So let's look at our example here if you sold a 50 strike put option and And in the end at expiration the stock actually falls down to $50 from wherever it may start from You'll have to buy the stock and that outlay would be $5,000 of cash You know you got to buy each option contract is worth 100 shares of stock So if you sold one put option contract you're on the hook to buy 100 shares of that stock Now if the strike price is 50 right here You're on the hook to potentially lay out $5,000 at expiration if you're called upon to fulfill the contract now When you make the trade You know months prior if the stock's at say 70 or 80 dollars at that time You're still required to have $5,000 of free cash That's going to be held aside by your broker at all times While the trade is active whether you end up buying the stock or not You don't know that until expiration time. You're still going to have to have on hold off limits to you $5,000 that's called a cash secured put menu You're going to have that $5,000 of cash on hold ready to go at all times Now is that the best way to use your money? You don't know if you're ever going to buy the stock at $50 But your broker in a cash In a cash account is Going to require you to always have that $5,000 of cash on hold now Let's just say you have a $10,000 account And all of a sudden you have to have $5,000 of cash held aside now You've used up 50 of your your account value just For the potential to maybe buy these shares at $50. You don't know if it's going to happen until expiration So that's the one way that's the first type of account a cash account now in the in the u.s in the united states Retirement accounts have to be cash secured puts if you're going to sell puts in in in a retirement account You have to hold 100 of that cash at all times. That's just the rules in the u.s I don't know how it is outside the u.s But here in the u.s If you're if you're selling puts in a retirement account it it will be a cash account So you will have to hold those that full cash 100 of that cash value On hold at all times now if you're doing it in in a non retirement account Then you can choose either the cash account or the the margin account. So let's move on to the margin account Now if you sell these put options in a margin account You don't have to have the full 100 of the money on hold at all times It's only going to be a fraction of that amount and and most of the mainstream options brokers here in the u.s will only have I'm going to scroll down here a little bit The margin it's called the margin requirement in a margin account The margin requirement is the amount of cash that you're going to hold aside and most mainstream mainstream brokers in the u.s Hold roughly 10 to 20 percent of that full five thousand dollars Okay, um as the margin requirement So roughly you were talking $500 to $1,000 of your free cash balance will be held aside If you're using a margin account, that's 10 to 20 percent of that 5,000 you multiply 10 or 20 by 5,000 And you'll get your 500 to $1,000 of cash that needs to be held aside Uh minimum at all times while the trade is active. So you're in my opinion You're using your cash More efficiently in a margin account. I'm not gonna I'm not here to tell you which kind of account to choose That's up to you to decide But what I'm telling you is that if you have a smaller account say 10,000 dollars and you only have to hold 500 to a thousand dollars aside, you know You still have you know, $9,000 that you can play with versus the the cash secured You're using 50 of your funds in a cash Account when you're selling put options. All right, so that's really the difference on A cash secured or a margin account now in the margin account The amount of money that's held aside is what's called the margin requirement So just a term that you might need to know So let's look at a you know, like a real life example here and see what happens when you sell a put How much money you'll get and what the margin requirement may be At your broker you may have to call them and ask them or chat with them online Say, hey, what's the margin requirement when I sell put options if I have a margin account? so We used amd as our stock last week when we're doing the put selling example And I'm gonna I'm gonna go along with amd again. So I have this pulled up This is interactive brokers interactive brokers is an options broker very mainstream very popular around the world I use them personally So this is the the one of the screens that comes up when I want to look at options trading and and how and how much Options are paying when I sell put options. So we got amd here and we're looking at the april 2023 april 21st 2023 Expiration period that expires in 90 days and we're gonna use the you know The 50 strike put because we've been talking about the 50 strike put in the example here And when if and when you want to sell amd puts or whatever puts this is not a recommendation. I just want to make sure this this is just example only So amd finished friday yesterday January 20th at $70 and 10 cents. So we're looking at the 50 puts now again if you watch last week's video You know, I have that 20 buffer rule which you take 20 of the the stock price and then you can choose your your Strike price. So that would be about 56 56 dollars So we're using the 50 strike which which meets and exceeds that that buffer that I usually choose when i'm selling put options So we're using the 50 puts as our example and we want to sell this put option Okay, we want to potentially try to buy amd shares at $50 a year right now they're at 70 So we have you know $20 that amd would have to drop by april expiration in order for us to have to Follow through and and you know make good on the contract and buy the hundred shares So we don't know whether amd is going to fall to 50 in that time period But we're taking that we're taking that risk. We're stepping up to the plate and say, you know what? I'm good with potentially buying amd at 50. So I want to sell this 50 put So for the april expiration, it's went out 77 cent bid at 80 cent offer So we're going to just try to sell this thing at 77 cents and see if we can get filled now in order When if you if you use interactive brokers or not in order to invoke a trade We sell or we click on I should say the 77 bid you can just click on it And it's going to bring up an order line to Make the trade so in this case here, this is where the order comes up Okay, we're going to sell a amd 50 put right here And we want to put in a price we're going to put in 77 cents That's how you invoke the trade if you're if you're using interactive brokers And it's probably very similar with any other broker that you use if you want to sell an option You click on the bid price and you can always change the The price that you're looking to get in this case We're going to go right to the bid price and sell it at 77 Now in order for you to understand, you know, what your margin requirement may be if you're using a margin account You can easily tell what the margin requirement is ahead of time before you actually put the trade through And we're going to click transmit here. It's going to bring up another window This is the this is the window that shows you All the details about the trade. Okay, this is the amd april 50 put and we're going to sell it one contract right here And what's going to happen is is that we're going to get 77 dollars Once the trade executes and here's your your potential commission costs right here 61 cents to a dollar 54 that will depend on You know the exchange the option exchange that your order gets routed to and whether you're actually You know making a better Price in the market if you're if you're if you're tightening up the spread or if you're just taking out the bid Then your your commission is usually a little bit higher, but That's what's going to happen once you sell the trade here is what where you really need to pay attention to This is well This is where it's going to tell you what your margin requirement will actually be once you make the trade In an interactive brokers. Now. This is a paper trading account. This is a fake account Anyone most brokers today have a simulated account So they usually start you with a million dollars, which is very nice But in this case here is the your account value before you make the trade A million 47,655 after the trade you're going to get roughly 75 dollars into your account So you'll see that your account balance actually goes up Roughly 75 dollars post trade. Okay, so you're going to sell it for 77 dollars You're going to get a net of 75 so your account value increases by 75 dollars Down here these next two numbers is what the initial margin will be the initial margin is what the margin requirement will be As soon as you sell the trade as soon as you sell that option This is how much money is going to be held aside as the margin requirement in your account. You can see it's 702 dollars Okay, that's your initial margin requirement 702 dollars now if we take that and Let's just see what the percentage is Remember the maximum is $5,000 that you'd have to to kick out but right now your broker is only requiring 702 dollars 702 I have my calculator here divided by 5,000 Is 14 percent so that margin requirement is right smack in the middle of that 10 to 20 percent that I was mentioning 702 dollars of your free balance is going to be held aside as the margin requirement. That's 14 percent Now down here the maintenance margin $586 is a little more than 10 percent that that means that this is the minimum amount of money that will be held aside Regardless of what happens with the trade now the margin requirement can fluctuate over time based on where This price of amd moves to now if amd starts ticking lower over time while you're in the trade from 70 You know the 65 to 60 and it looks like hey You know you may have to end up buying these 100 shares of stock at expiration and kick out the $5,000 So what the broker is going to do is the the margin requirement is going to increase on you right now It's 702 dollars So if amd starts dropping down in price and it looks like it it's it's more likely that you may have to buy the stock The margin requirement will increase from 702 to maybe a thousand $1,500 $2,000 the more that amd falls the the higher the margin requirement will go up Because your broker needs to know that you're good for or you have the funds to potentially buy Those 100 shares so as if the stock drops the margin requirement will go up now if the stock goes up higher The margin requirement could fall But will never fall below this $586 The the broker needs to know that you have some skin in the game because they need to know that you're there to potentially You know buy the the 100 shares at $50 a share in the end But they're not going to require you to keep that $5,000 Here's the here's what you'll get right at the outset of the trade. Okay, so that's where you find out How much your margin requirement will be? If you have a margin account, okay, so we're not going to put this trade through we're going to cancel So all you have to do is if you want to know what the um I'm going to get rid of this one If you want to see the margin requirement, just you know, click on the trade See the that that account box and it'll tell you. All right. So that's really about it Let's go back to our um, where's my Here's my pdf right here. So that's really much much That's really about it on how to use a either cash or margin out now some people I want to say that let's move myself out here a little bit Some people like to use a cash secured put why because they always Or I should say a cash account because they always want to know how much money in the end They're going to have to pay out if they're assigned on their put options Now let's just say you sell lots of put options on lots of different stocks lots of different strike prices And all of a sudden, you know the market craps out and all the stocks drop at the same time And it looks like you're going to have to follow through and buy all these shares of stock at the same time How much money will you need? To Potentially buy all those shares of stocks. So some people would rather use a cash secured type of account knowing that They'll always know at all times how much of their account value is going to be used to buy all these stocks at the same time Now if you're if you're if you're selling lots of put options in a in a margin account You and everything, you know drops at the same time. Let's say like right during covid You're going to be on the hook to potentially buy all these shares of stock and you and your account may not have All the cash necessary to pay for all these shares of stock. So something you need to be careful about And you know if that happens to you in a margin account, what you'll get is the margin call From your broker a margin call is basically you'll get an email Or maybe you'll get a phone call from your broker saying hey, look at you know, all it looks like your stocks You may have to buy all these stocks. You don't have enough cash in your account We're going to need you to either deposit more funds into your account or we're going to start liquidating some of your other positions That you may not want liquidated. So just Here's the warning is you know, be careful know what you're playing with know what strike price you're using Know how many contracts you're selling if you sell five contracts That's 500 potential shares if you tell one contract one option contract. That's only 100 shares of stock So, you know stay in your comfort zone Know how much you're playing with and know how much your account could handle If you have to buy all these shares at the same time All right, so that's really about it lesson for today Margin or cash account you decide it's up to you Also, though Down here last line right here. You must be approved for a margin account with your broker So it's it they will ask you if you're just opening an account for a first time They will ask you do you want a cash account or margin account and you can You know click on the margin account, but they still have to approve you. What's their approval process? That's that depends on the broker. They may have they may see how much money you have They may ask you questions like how long have you been trading options for do you understand the risks? So it all depends on how you answer the questions If you're not approved Then you're going to just have a cash account and then you'll have to have the you know the 100 percent Hold the side at all times So you have to figure out how to open a margin account if that's what you want All right, so that's all for today What you're going to see at the end here is you're going to see last week's video pop up about selling put options Uh for 2023 our method Once again, don't forget to go to our website, you know sign up for the free put selling basics ebook And um, you know, that's it for today Leave me a comment if you wish give me a thumbs up. Don't forget to subscribe to this channel. Send me an email I always answer. I love to hear from you guys and I hope this has been has given you some good value All right, that's all for me today. I hope everyone has a great weekend and a great trading week ahead This is lee lull signing off