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Frequently Asked Questions

While you are new to Investing Daily’s Wealth Society, and before you post questions in the Stock Talk forum, please read through these Frequently Asked Questions. If you have a question about getting started, you can be sure that many others have had the same question before you!

The FAQs below are broken into four groups:

I. How can I manage my Wealth Society account?
II. How do I start earning money with the Wealth Society?
III. What is the day-to-day Wealth Society experience like?
IV. I’m ready to go further with my trading. What other tools do you have?

I. How can I manage my Options for Income account?

For general account questions and website login instructions, and to control the messages you receive from Investing Daily, see Managing Your OFI Account.

I didn’t get a Trade Alert in my email, or I didn’t receive a text on my smartphone. What happened?

Rest assured that Investing Daily faithfully sends emails and texts to every OFI subscriber who is set up to receive them. If you did not receive a Trade Alert in the way you expected, here are some things to know:

Jim Fink often chooses to work during the wee hours of the morning. He posts new Trade Alerts on the OFI website long before Investing Daily staff arrives to send the Alerts out through text and email at 8:00 a.m. ET. Experienced OFI members usually log into the website as the fastest, most reliable way to see new Alerts.

Even after the emails and texts go out at 8:00 a.m., confounding factors can prevent their delivery. It’s happened that Investing Daily’s email vendor “goes down” for a few hours. It’s happened that Yahoo!, Google, and other providers “go down” for longer. We at Investing Daily can’t control such factors.

It can also happen that your email program marks a much-anticipated Trade Alert as spam. To help ensure that the email alerts show up as expected in your inbox, see how to whitelist emails from Investing Daily.

In addition, please log into your Options for Income account and look at the Notifications tab. Make sure that “Issue Notifications & Flash Alerts” is check-marked. 

A special note for members who turn their smart phone Trade Alert texts on and off: If ever you want to stop the Trade Alert texting service, text back STOP and our texting vendor will block your number so that you don’t receive Trade Alert text messages. But don’t delete that text thread — when you want to begin getting the Trade Alert text messages again, text back START and our texting vendor will unblock your smart phone number so that you’ll resume receiving OFI Trade Alert texts. 

If you still don’t receive Alerts the way you expect, contact Investing Daily’s Customer Service Department at CustomerService@InvestingDaily.com or (800) 832-2330 during normal business hours. Our friendly reps will check to make sure that Investing Daily has your correct email address and/or smartphone number. Sometimes our Wealth Society accounts need special handling. The reps may also be able to help you track down the problem by sending you screenshots showing that the Alerts are at least leaving Investing Daily as expected.

II. How do I start earning money with Options for Income?

The general sequence is:

  1. get approval from a broker to trade options
  2. understand the logic and terminology of a put credit spread trade
  3. figure out how to place a trade online (skip this step if you prefer to phone in your orders)
  4. get a rough idea of what happens after you place your first put credit spread trade
  5. know where you can find more Options for Income help

How do I choose an options broker?

Before you can take advantage of options, you’ll need authorization to trade them separate from any other authorization you may have. The fact that you have a stock brokerage account does not mean you are authorized to trade options. You must request an options authorization separately.

There are numerous brokers to choose from. Barron’s Magazine’s annual ranking of online brokers is a valuable informational resource for investors looking for a broker. You can also see a Comparison of online options brokers, including the brokers most often used by experienced Options for Income members.

At Investing Daily, we’re not affiliated with any particular brokers.

What do I need to know about filling out the broker’s options application?

Jim explains the simple process in this video, Setting Up Your Options Account.

The good news is that getting authorized for options trading usually means less than five minutes’ work on your part. Keep in mind: You are not applying for a mortgage here. Your broker will want to know that you have experience trading options and that you understand the risks involved. But they are not going to audit your background, test your knowledge or check your financial history.

Options brokers define different trading levels based on the risk of the options’ strategy. A higher-level authorization gives you more capability to trade different options strategies. If you are authorized to trade options spreads, your broker will require you to sign a margin agreement.

Here are a few tips to help you answer the authorization questions so that you can trade using Jim’s strategies:

  1. Investment Objective
    Your best chance for a high trading level authorization is if you put down “speculation” as one of your objectives. Selling put credit spreads at an appropriate position size is no more speculative than buying shares of stock, but brokers seem to think all option trades are speculative, so you will want to state “speculative” for the sake of your broker’s policy guidelines, not because you actually intend to trade speculatively.
  2. Trading Strategies
    The more strategies you check off, the better your chances of getting full authorization. Feel free to check off all of the strategies listed even if you don’t initially plan on trading all of them.
  3. Trading Experience
    Don’t be shy when answering this question, but honesty is the best policy. The more years you say you’ve been trading stock and options, the higher your trading level authorization will be.
  4. Net Worth
    Higher is better, but again honesty is always the best policy.

How much money should I initially fund my options account with?

(Jim Fink is not a registered investment adviser and consequently cannot provide personalized investment advice, which includes position sizing.)

Most of Jim’s three-month put credit spread trades technically require only $500 per contract plus trade commissions to be held in your account — you’ll see why in any New-Member Expanded View, as discussed in an FAQ below. That said, some brokers have minimum deposit amounts and Federal regulations require a balance of at least $2,000 for an account to trade on margin. 

I live outside of the United States. Can I still trade with Options for Income?

We researched a few brokers and the answer is “yes, probably.” Interactive Brokers, TD Ameritrade, and Tradestation work with international residents who want to trade U.S. options. Questrade is a Canadian brokerage. CommSec is an Australian brokerage, but we hear they have high commission fees.

Do brokerage firms allow put credit spread trades using IRA accounts?

Most brokers, including TD Ameritrade (thinkorswim), Fidelity, Ally/TradeKing, E*TRADE (optionshouse), Tasty Works, and Interactive Brokers, allow the trading of defined-risk options strategies such as put spreads in an IRA account based on “limited margin.” You may need to fill out a little additional paperwork such as this form from Fidelity

The only trades prohibited in IRA accounts are: (1) shorting stock; and (2) selling naked calls. Selling naked puts must be cash secured, meaning that you need the full purchase of the 100 shares required to be purchased if assigned.

For option spreads, the margin requirement is the same for both taxable accounts and IRA accounts: (spread width multiplied by 100) per contract. A five-point spread requires margin of $500 per contract (including the credit received for selling the spread).

I only got approved for Level 1 or 2. I can’t trade spreads. What do I do?

Several of the trading platforms, including TD Ameritrade’s thinkorswim and Charles Schwab’s OptionsXpress, allow you to do “paper trades” as a way to practice options trading using fake money. Paper trading is a great way to increase your trading experience (and confidence!) so that you can reapply for a higher trading level than you were initially granted. Read more about paper trading here and then start placing Jim’s put credit spread trades exactly as if you were using real money.

I’m new to options and I don’t understand Jim’s Trade Alerts. Where can I get plain-English explanations so that I’m more comfortable placing the trades?

 

You can also read the definitions of basic options terminology at the Options Industry Council.

How do I know which trades to make?

If you’re new to options trading, look for Alane’s Expanded Views. 

A Thursday Trade Alert may contain multiple new-trade recommendations, not all of which are appropriate for new traders. Jim recommends that you start by trading one contract for a “put credit spread” whose expiration date is three months in the future.

  • Why just one contract, which represents 100 shares of the underlying stock? New options traders are often nervous that something will go horribly wrong, so trading a single contract with Options for Income is a low-risk way to prove to yourself that those fears are groundless.
  • Why a put credit spread? Because that kind of options trade is conservative, educational, and has controlled best- and worst-case scenarios – plus you get the immediate payoff of having cash deposited into your account.
  • Why a three-month expiration date instead of a faster one- or two-month expiration date? So that you have time to settle into Options for Income as you watch your trade develop. You’ll find that once you’re over the hurdle of placing your first trade, this low-risk method of earning income all starts to make sense.

Since a three-month put credit spread is best for new traders, that’s usually what Alane chooses as a starting point for a new-member Expanded View. She won’t write an Expanded View for trades that are inappropriate for new traders.

As a new member, should I enter old trades or wait for new ones?

Most new OFI members wait for new Trade Alerts. They come out every Thursday except for on major holidays.

If you aren’t able to immediately trade a Thursday Alert with the other members because your options account isn’t ready, for example, don’t worry: OFI put credit spread trades can be initiated exactly as written any time within 8 days after they’re posted.  

Jim almost always provides a Thursday trade that’s appropriate for new members. But if you don’t receive a three-month put credit spread trade on your first Thursday with Options for Income, it’s fine to use a three-month put credit spread that Jim posted on the previous Thursday. See Expanded Views for a list of appropriate recent trades and start with the most recent one.

Put spreads are neutral to bullish trades. What if a bear market occurs? Should I wait until after a correction to start trading OFI recommendations?

Market timing is a fool’s game, so Jim doesn’t play it. He favors bullish put credit spreads generally because the stock market rises two-thirds of the time and has averaged an annual real gain of 7% for more than 100 years. In the October 4, 2011 market briefing Jim discussed the long-term equity returns of the stock market and wrote:

The OFI Portfolio will always be net long equity exposure. In the short run, equity exposure can be unpleasant because stocks decline during bear markets and recessions. But keeping our focus on long-term wealth generation will pay off in the end. Market timing doesn’t work and will likely cause you to miss out on the largest equity returns. You need to stay in the equity game in order to fully benefit from the long-term wealth statistics mentioned above.

OFI is net long at all times, but loses less money during bear markets than would a buy-and-hold stock portfolio because Jim sells put spreads at strike prices below a stock’s current market price. If Jim knew for certain that the market was going to drop, then of course his entire portfolio would be composed of bearish trades, but certainty doesn’t exist and therefore the best trading strategy is diversification – both in terms of directional bias and expiration month.

In Jim’s experience, bear markets are only identifiable after the 20%-plus damage has already been done. One method to avoid (not identify) market crashes is the simple 10-month moving average. If the stock indices close a calendar month below the 10-month moving average, risk has increased and more bear call spreads would be justified. An increased number of bear call spreads and/or reduced position sizes are okay “tilts” to express your market caution, but OFI will always have a portfolio consisting of a majority of bullish trades because historically betting on the market rising has generated the most wealth over time (by a long shot).

The key to successfully navigating a bear market is not to panic at the bottom but remain invested through the entire cycle – both down and back up. We can’t count the number of people who sold out at the market bottom in March 2009 and missed the entire ride back up to new all-time highs.

I can’t figure out how to place the trade on my broker’s website. How do I get more help?

If you need help placing the trade on your trading platform, and prefer not to simply call your broker and read Jim’s Trade Alert instructions aloud to the broker, you can watch how-to videos for placing put credit spreads with TD Ameritrade’s main platform, thinkorswim, Fidelity, and Ally/TradeKing to see trades being placed. Even if you’ve chosen a different broker, these videos will give you an idea of how the online process works.

All of the major trading platforms have support staff waiting for your call – they are eager to help you get started with their trading platform. You can find their contact information on their individual websites.

I am trying to enter a trade online, but I can’t find the right option ticker symbol on my broker’s order entry page. What do I do?

Occasionally individual brokers will refer to a security by an alternate ticker symbol. Do not place a trade if you aren’t certain that you have the right ticker symbol for your broker. Stop and contact your broker to find the correct one.

The put credit spread Trade Alert says that I should choose April expiration dates, and on my broker’s trading platform I see several April expiration dates. Which one does Jim mean?

Most Options for Income put credit spread trades are monthly options (not weekly options). Monthly options expire on the third Friday of the month. In this case, you would choose the expiration date that’s the third Friday of April.

You can also see the exact date in the Trade Alert’s option symbol: the middle characters in DIA170421P191 mean 2017-04-21.

If Jim ever wants you to place an order for a weekly option, he will say so explicitly.

On my broker’s trading platform I see strike prices but not the strike prices that Jim recommends. Should I just use any strike price that I see on the trading platform?

No. It’s critical that you use the exact strike prices that Jim recommends. Almost certainly the platform is simply displaying a narrow range of near-the-money strike prices by default. Look for a way to expand the range of strike prices being displayed, or contact your broker to see how to enter Jim’s prices.

OK, I’ve placed my first trade. Now what?

Congratulations! See What Happens After I Place a Put Credit Spread Trade?

I submitted my order but it doesn’t look like it filled – should I keep waiting, or do something?

See What Happens After I Place a Put Credit Spread Trade?  Note that some Options for Income members lower their net credits earlier than Jim recommends, settling for less profit and increased risk. If you choose not to follow Jim’s advice, please do NOT post your unauthorized trade fills in the Stock Talk forum as it confuses other members. And if the unauthorized trade does not go the way you intend, please do not ask Jim or other OFI members for advice.

I see that some of Jim’s Trade Alerts are about new trades and some are about rolls. Am I supposed to do something with the roll Alerts?

Jim sometimes tells the experienced members to roll a trade when it gets close to expiration. As a new member, you can ignore roll Alerts for any trade that you didn’t open back when Jim originally recommended it. You can see more about rolling put credit spread trades here

I’m new to Options for Income and have a question that isn’t answered in these FAQs. Where do I go for help?

If you need help placing the trade on your online trading platform, contact your online broker.

The individual put credit spread trades’ logic and terminology are explained in detail in the Expanded Views.

If you have a general question about options trading or your Options for Income experience, you can post it in the New Member Stock Talk forum or you can use the white Search bar in the website’s upper right to see if the answer is available on this website.

Once you’ve placed your first trade, you’ll enjoy watching the other OFI members discussing it. And soon you’ll want to join the conversation. To discuss a particular trade, see the Comment section at the bottom of that trade’s Alert. But be sure you’ve read this far in the FAQs and have visited the New Member Stock Talk forum first — most new-member questions have been asked and answered many times before.

You may find your answer by reading the more advanced FAQs below.

III. What is the day-to-day OFI experience like?

I’ve browsed through the New Member Stock Talk forum and now feel ready to join the main Stock Talk forums with experienced OFI members. How should I get started with them?

The easiest way is to focus on a particular trade that you’ve made. Find that Trade Alert on the OFI website and scroll down to the bottom to see fellow members revealing in Stock Talk whether their contracts have filled yet, what net premium they were able to get, which brokers they use, and so on.

Feel free to post (be concise) the same sort of information from your perspective – OFI’s Stock Talk is an amazing community filled with supportive members who remember how it felt to be new at options trading. Now you’ll be joining their ranks.

How can I make my photo appear in Stock Talk?

If you use Facebook or other social media, you have an easy way to add your image to Investing Daily’s Stock Talk forums.

  1. Log into your social media account.
  2. For desktop PCs, right-click on your profile photo. Do you see an option like “Copy image address”? Click it.
  3. Go to Edit Website Profile on the Investing Daily website.
  4. Edit your “Display Name” however you wish.
  5. Paste the URL that you copied from social media into the “Profile Photo” field.
  6. Click the “Save Profile” button.

Your image will now show up in Stock Talk on the Options for Income website and all other Investing Daily websites. The process using a Mac or mobile device will be similar.

Where can I find the history of all OFI trades?

In the right column of this website you’ll see the “Latest Closed Positions” performance data that makes Options for Income famous in the financial industry.

You may also view all Open and Closed trades by clicking on the Portfolios link in the top navigation bar of this website. Most recent trades are in the Conservative Income portfolio — use the Open and Closed buttons at the top of that page to toggle between the two views.

  • With open trades, the default sorting is by expiration date, nearest to furthest. You can also sort alphabetically by clicking on the “By Alpha” tab. 
  • With closed trades, the default sorting is random. You can also sort alphabetically by clicking on the “By Alpha” tab. The “By Date” tab doesn’t work with closed trades because the expiration dates are in the past and no longer exist.

And while looking at the Portfolios you may click on the blue trade date next to each trade in order to view the original email Trade Alert.  

As I ramp up my options trading, how much cash should I hold in my margin account?

(Jim is not a registered investment adviser and consequently cannot provide personalized investment advice, which includes position sizing.)

Each 5-point contract requires $500 plus commissions in your margin account. If you plan to trade one contract for each Trade Alert that Jim sends, you’ll soon have around 40 live contracts (some new, some middle-aged, and some near expiration) working for you. At that one-contract level you would need around 40 x $500 = $20,000 in your margin account and you would earn around $6,700 per year. Many current members prefer to keep $30,000 in the account for added flexibility. If you’re able to fund more contracts at a time, your income rises — for example, at the ten-contract level with $200,000 in your account you can earn upwards of $67,000 per year.

Several OFI members have posted their personal position-sizing rules in the Stock Talk forum. For example, one experienced OFI member has stated that he can have upwards of 30-35 spread positions open simultaneously, and he keeps about 25-35% of his account in cash. Assuming 30% cash, that leaves 70% for option positions. Divide 70% by 35 open positions yields an allocation per position of 2% each (70/35).

Federal regulations require that you maintain at least $2,000 in your margin account.

Why does my brokerage account make it look like I’m losing money on my spreads?

Jim likes the analogies of “airplane turbulence” and “the only poll that matters is on election day.”

Furthermore, the “loss” could be nothing more than a mirage based on the market maker (MM) trading at the bid/ask spread of the option. If the MM trades at the bid of an option one is long, the position immediately looks like a loss even though the stock price hasn’t changed. If the MM trades at the ask of an option one is short, the position immediately looks like a loss even though the stock price hasn’t changed.

Lastly, even if the last trade was not filled on the bid or ask, many brokers value options at the bid price for options you are long and at the ask price for options you are short (i.e., worst possible “natural” prices). In reality, you would be able to buy back your short options and sell your long options near the mid-prices of the bid/ask spread.

I’m an experienced options trader. Do I have to wait for new Trade Alerts to get started?

Once you’re an experienced options trader, sometimes old trades and the second half of rolls are viable as new trades, or can be adjusted to become viable. Jim prefers adjusting the strikes to those that are out-of-the-money, have positive seasonality of 80% or higher, offer at least a $1.00 credit, and generate at least a 20% rate of return. He usually starts at five-point spread widths. See more about rolling put credit spread trades here

Jim just sent a Trade Alert for a call debit spread. What’s the difference between call debit spreads and OFI’s usual put credit spreads?

Theoretically, put credit spreads and call debit spreads should always offer the exact same risk/reward (adjusted for interest rates). But Jim sees circumstances under which one strategy is better than the other. See more about call debit spreads here

Why does Jim prefer selling put spreads to simply selling a single put? Doesn’t buying a lower-strike put reduce the amount of net income you receive? 

Buying the lower-strike put reduces the net income only slightly, but offers two significant advantages over simply selling a single put “naked” (i.e., without any lower-put insurance coverage):

  1. Provides insurance against a large downside move and limits risk of loss to five points per share of downside ($500 per contract, assuming a five-point width on the put spread). In contrast, selling a naked put has downside risk all the way down to a stock price of zero.
  2. Significant reduction in margin requirement (because of the limited risk) which allows portfolio capital to be utilized more efficiently and allows the put spread to generate a much higher potential rate of return than selling a naked put. For example, take a $200 stock with a put strike at $200 trading at $5.00 and a put strike at $195 trading at $3.35, if you sell a five-point 200/195 put spread, it will bring $1.65 per share in income, and the investment risk on the put spread will be $335 ($500 spread width minus $165 initial credit received), whereas investment risk on the naked put is $19,500 ($20,000-$500 received). In retirement accounts where margin is not allowed and naked puts must be 100% cash secured, this difference in the amount of capital tied up in the trade is huge (58 times higher).

In a taxable margin account, by contrast, initial margin on a naked put is about 20% of the underlying stock price, or about $4,000 in this stock example, which is still 12 times larger than the $335 investment risk on the five-point put spread. Furthermore, the margin on the put spread is fixed regardless of a subsequent stock-price decline (i.e., no chance of margin call) whereas the margin requirement on the naked put can increase dramatically if the underlying stock falls in price (i.e., margin call very possible).

The much-lower margin requirement of the put spread also frees up portfolio capital to make other profit-generating trades, which increases portfolio diversification.

Recently a new member asked Jim about this in Stock Talk. Consider Jim’s reply:

“You are correct that selling naked puts has a lower breakeven price than a put spread and therefore has a higher probability of success. This is especially true when the naked put is done at a lower strike price than the short put in the put spread.

“On the other hand, a naked put sold at 125 has a huge margin requirement that will result in a very low single-digit rate of return. I calculate rate of return on naked puts as:

        net credit/(strike price – net credit) = 1.10/(125-1.10) = 1.10/123.90 = 0.9%

“Less than a 1% rate of return with unlimited downside from 123.90. Not an attractive trade to me. Anyone can generate a high probability of success by selling deep out-of-the-money naked puts on virtually any stock without doing any valuation work, but the tradeoff is a very low potential rate of return combined with the certainty of rare but huge blowups every now and then that easily wipe out the majority of tiny gains. It’s called picking up pennies in front of a steamroller.

What are Jim Fink’s criteria for establishing new positions on put spreads?

  • 20% minimum potential rate of return, defined as: (initial credit received)/(spread width of put strikes – initial credit received)
  • out-of-the-money (OTM) put strikes the short put strike is at or below Jim’s estimate of the underlying stock’s intrinsic value the underlying stock exhibits positive price seasonality of 80% or higher over the past 10 years between the current start date and the expiration date

Do dividends affect my options? What about special dividends?

The only time you need to worry about ex-dividend dates causing early assignment is when you have sold a call option that is in-the-money during the couple of days prior to an ex-dividend date. For in-the-money call spreads, ex-dividend dates must be watched carefully since there is a chance of early assignment on the short call option to capture the dividend.

In contrast, for put spreads, regular dividends are anticipated in put option prices, and there is no material price change when a stock goes ex-dividend, nor is there a materially increased chance of early exercise on the short put. 

Special dividends are considered “unanticipated,” and consequently, the Options Clearing Corporation adjusts option strikes down by the amount of the special dividend, so there is no detrimental effect for option spreads (puts or calls).

Should I close out a winning trade early?

OFI never closes out winning trades early, but some OFI members do if they need margin buying power for other trades or are unable to monitor their trades for a period of time.

What if I’m on vacation, not well, or otherwise unable to monitor my existing positions?

Jim’s advice for people in these circumstances is to close out any vulnerable positions until you are able to pay attention and trade again.

For example, if you are travelling without internet access at the beginning of June, prior to leaving you should consider closing out your option positions expiring in June. Upon your return, you may consider re-opening these June positions if they still make investment sense, or if they were rolled in your absence you can consider opening the later-dated rolled positions if they still make investment sense.

If you’re not sure how to close your existing contracts, contact your broker for guidance.

I’m in the money (ITM) on a spread. Will Jim issue a Trade Alert to roll or close out?

Usually the earliest that Jim will issue a Trade Alert to adjust an in-the-money spread is three weeks prior to expiration. You are never alone! Your fellow Options for Income members will be avidly discussing the trade in the Stock Talk forum.

Jim does not issue Trade Alerts on successful out of-the-money spreads set to expire worthless for maximum profit, because expiration is automatic and no action is required on the part of the trader. You will simply see fellow members celebrating in Stock Talk.

See also What Happens After I Place a Put Credit Spread Trade?

“When are you going to roll …”

Jim is actively watching every open OFI trade and will issue a Trade Alert when he believes an in-the-money needs to be adjusted, whether the adjustment constitutes a roll or a closeout.

There is no need to ask when Jim will make such a decision and asking will in no way hasten the decision-making process. In fact, asking about rolls that are not strategically ready to occur often confuses other OFI members.

One of the OFI Trade Alerts is a roll “adjustment” to an existing trade. How can I participate if I don’t already have the existing position?

You can’t roll an option position that you didn’t originally open, so if you’re new to options trading you would ignore the roll Alert.

New option positions are “to open.” In a roll Alert, experienced members can open a new position using the “to open” option legs (the second-half portion of roll trades). If you choose to participate in the second-half portion of roll trades, keep in mind that you may need to adjust the strikes to out-of-the-money as Jim requires for new trades.

The easiest thing to do if you didn’t open the original trade is to simply ignore roll Alerts altogether and focus only on upcoming new trades. See more about rolling put credit spread trades here

How can I tell if my short-put option is at risk of getting assigned early?

For puts, early assignment is unlikely until option expiration is three weeks or less from the current date, so Jim doesn’t start analyzing short puts for assignment risk until the last three weeks. The risk of early assignment becomes significant if the short put is deep-in-the-money and no longer possesses any time value. As long as time value exists, a put option owner who is intent on exiting the position is better off selling the option for its full value, which is composed of both intrinsic and time value, rather than exercising the option and only receiving the intrinsic value (thus forfeiting the time value).

For example, assume the current price of XYZ $60 put is $2.75. With the stock currently trading at $57.70, the intrinsic/exercise value is $2.30 (60-57.70). Time value that would be forfeited by early exercise is $0.45 (2.75-2.30). Consequently, early exercise would be unlikely.

In contrast, if the XYZ $60 put price was only $2.30, then the option value would be composed entirely of intrinsic value with no time value remaining, so early assignment would become much more likely because the put owner would not be forfeiting any time value by exercising the option.

For calls, early assignment risk is slightly more complicated and can occur for two different reasons: (1) lack of time value as is the case with put options; and (2) dividend capture on the day before an ex-dividend date, where the amount of the dividend is larger than the time value remaining in the call option.

For example, assume the current price of XYZ $60 call is $2.75. With the stock currently trading at $62.40, the intrinsic/exercise value is $2.40 (62.40-60.00). Time value that would be forfeited by early exercise is $0.35 (2.75-2.40). The stock is going ex-dividend tomorrow, and the dividend is worth $0.50. Consequently, early exercise after the close of trading today would be likely because the dividend amount of $0.50 is greater than the $0.35 of time value that would be forfeited by exercising the call early.

In contrast, if the dividend was worth only $0.25, early exercise would be unlikely because the $0.25 dividend would be less than the $0.35 in time value that would be forfeited by exercising early.

I got assigned on the short put that I sold. What do I do? What if I don’t have the cash to cover the cost of purchasing 100 shares of the stock? How large is my maximum potential loss?

If assignment of a short put does occur prior to a roll decision, it is a minor inconvenience that can be easily rectified by simply selling the 100 shares of stock per contract that has been assigned and simultaneously selling the remaining lower-strike put you are long (as part of the original spread) since you no longer need it for insurance.

You don’t need the cash to purchase the 100 shares per contract of assigned stock if you sell the assigned stock on the same day you are notified of the early assignment. There is no margin call on an early assignment because your broker knows that your risk is limited to the spread width, so even if you don’t have the money in your account to purchase the 100 shares per contract of assigned stock, your broker will purchase the 100 shares per contract of stock for you and simply require that you sell the stock immediately. This one-day waiver of margin requirements is called “same day substitution.”

Your maximum loss is limited to the spread width minus the initial credit received. For example, if you initially sell a 100/95 put spread for $1.00 per share ($100 per contract) and the stock falls to 40, the 100 put you are short would be exercised against you and you would be required to buy the stock at 100. You could either: (1) sell the stock at the current market price and simultaneously sell the 95 put you are long; or (2) exercise the 95 put and sell the stock at the 95 strike price.

Maximum loss would be the spread width of $500 per contract [(100-95)* 100 shares per contract] minus the $100 credit per contract received up front when the spread trade was initiated. This maximum loss of $400 per contract does not change – regardless of the actual price of the stock. The stock could drop to 40, 20, or even zero – it doesn’t matter how low – your loss remains limited to $400 per contract.

You can read about two additional responses to assignment in What Happens After I Place a Put Credit Spread Trade?

How will trading spreads with Options for Income affect my taxes?

At Investing Daily we don’t give tax advice, but here here are two types of resources that do:

  1. Your options broker can be a good resource for options-related tax questions. TD Ameritrade offers this practical information: “Around February of next year you will receive a consolidated form 1099 that we prepare and send to the IRS per their instruction. We do offer the ability to import this information to some tax software, such as TurboTax. Regarding how option spreads are taxed, you can always give us a call to speak directly with our Tax Team and they will be able to provide more clarity on a specific example.” This is how tastytrade explains Taxes for Traders.
  2. If you want to be more hands-on with your tax preparation, TradingLog may help. See their Comprehensive Guide: Special Tax Rules for Options

I see people talking about Jim’s other service, Velocity Trader, in the Stock Talk forum. What’s the difference between OFI and VT?

OFI is a conservative trading service based on out-of-the-money (OTM) put credit spreads that can generate maximum potential profit in the 20% to 40% range by time-value decay alone (i.e., no directional movement is required) with an 85%-90% probability of success. Average trade duration is two months.

VT is a more aggressive service based on at-the-money (ATM) call and put debit spreads that require directional movement to be successful. Predicting price direction is much more difficult than simply playing time-value decay, so the probability of success of these aggressive trades is lower than OFI’s put credit spreads — Jim is shooting for a 60-70% win rate compared to OFI’s 85%-90% win rate. Average trade duration is ten days.

The good news is that the potential returns of VT are typically in the 100% range — much higher than OFI’s trades — and therefore the overall profitability of the VT service may be higher than OFI despite a lower win rate. For example, OFI trades typically risk $4 to make $1. VT typically risks $1 to make $1. As an illustration, but not based on any hard data, see the following assumptions:

     Expected return on OFI: 85% winners * $1.00 -15% losers * $4.00 = $0.85 – $0.60 = $0.25 net profit per share

     Expected return on VT: 65% winners * $1.00 – 35% losers *$1.00 = $0.30 net profit per share.

These numbers are simplistic because most trades won’t suffer maximum potential loss, but you get the idea.

VT averages two new trades per week that are issued on Tuesday mornings and includes a video discussion of general market commentary and chart analysis of that week’s recommendations. In contrast, OFI does not provide a video discussion.

IV. I’m ready to go further with my options trading. What other tools do you have?

Take a look at the Options for Income Tools and Research page, where Jim has collected his favorite training resources.

As you get more comfortable with options, you’ll enjoy exploring the many tools collected in our Options Toolbox. We have compiled numerous types of calculators numerous calendars that augment Jim’s trading explanations analytical tools paper trading simulators and more, from sources as diverse as the Options Industry Council, University of North Carolina, and Yahoo!. Have fun!

What is the Options for Income Ten-Year Seasonality Indicator App?

This amazing software application, developed especially for Jim Fink’s Options for Income by a generous long-term member, is unavailable anywhere else. With this software, you can quickly look up a stock selection’s ten-year price history and find out its value in a seasonal context. If a certain stock usually gains in value during a certain time of the year, the Seasonality App will give you that information.

Please note that the Seasonality Indicator is only compatible with PCs, not Macs.

Is there documentation for the Seasonality App?

There is a User’s Guide built into the app. Simply press F1 to get to it.

What is the Ivy Portfolio Market-Timing System?

The Ivy Portfolio Market-Timing System is based on the 10-month moving average, remaining invested when a stock index is trading above its 10-month moving average and moving to cash when the index is trading below its 10-month moving average.