Hey Good Kids!
I wanted to chat with you about something that's been coming up with my coaching students a lot lately. They're getting too caught up in the profit and loss of their covered calls and short puts. And you know what? I totally get it—we're all here to make money, right?
But here's the thing: focusing too much on P&L can actually trip you up. When we sell a covered call, we're saying we're okay with letting our shares go at the strike price we chose. Same deal when we sell a put—we're getting paid to potentially buy the stock at that strike price. It's all about the logic behind why we made those trades in the first place.
Let me share a story. Just this week, one of my students was fixated on the P&L of her option. She was stressing out because the price of the option showed a loss of $500, and she was considering closing it out for a loss. But she forgot to ask the important questions:
What is the strike of the option you sold?
Where is the stock trading now?
How soon does the option expire?
Has anything changed in my original thesis?
The option price will fluctuate—that's just part of the game. But the P/L should NOT be the reason to bail on your strategy.
Remember, our goal is simple: buy low and sell high. We're not trying to hit the absolute bottom or top because, let's be honest, no one knows where that is. That's why I usually aim for a 1% return every 30 days. For example, if I'm selling a $100 strike 30 days out, I'm looking to collect $1 or more for the obligation to buy the company at a lower price.
I talk a lot about how I choose where to sell puts and covered calls in my latest ebook that available to all Inner Circle Members. If you haven't signed up what are you waiting for? It's less than you spend on a price of coffee each week.
I've seen too many people exit covered calls or short puts for a loss when, more often than not, those options would expire worthless. If you're not comfortable letting your shares go at the strike price, you shouldn't be selling that call. If you're not okay with owning 100 shares at the strike price of the put, you shouldn't be selling that put.
Focusing on P&L can stir up emotions and lead to hasty decisions. It might cause you to take a loss when, in reality, the option could expire worthless or, worst-case scenario, you end up owning shares you wanted at a price you're comfortable with.
So here's my reminder: stick to your plan. Remember why you sold that call or put in the first place. Don't let the day-to-day swings distract you from your strategy.
Just wanted to share this with you all because it's easy to get sidetracked. Stay focused on the bigger picture.
Happy Trading, Good Kids!
-$Maxwell
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