Which Shares To Sell | Podcast Episode #441

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Hey, I’m Ryan Mallory and this is my Swing Trading the Stock Market podcast. I’m here to teach you how to trade in a complex, ever changing world of finance.

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Hey everybody. This is Ryan Mallory with shareplanner.com’s Swing Trading the Stock Market and today’s episode we’re going to talk about what shares do you trade in your portfolio?

0:40
Let’s say you have about 1000 shares in a trade and they have different entry prices. Maybe you bought the stock ABC at $80, $100, $150.00 and so you wanted to decrease your position size.

0:54
Do you do the first in, first out, last in, last out. How do you approach this and so? I’m going to stay away from the tax implications of it and I just want to kind of break down some other aspects of what this particular listener to the show is asking.

1:08
This is actually a repeat person that has written the show before and he wrote again and I’m all about encouraging people to write the show multiple times if they so wish because sometimes we get a an update on a previous story or just an entirely new question as a whole.

1:27
But this particular person, we call him Jamie Cole. That’s what I called him in the last episode. That’s what I’ll call him again here, he writes.

1:35
Ryan, what’s up, boy? You spelled it BOI this. Is your Melbourne neighbor Jamie Cole? I wrote you a few months back, Yes, because I think he called me boy back then too. I thought we said it back in the 90s, so I’m already guessing Jamie Cole is somewhere in his mid 30s to mid 40s that would be my guess just based off of how he typed BOI.

2:02
So this question is in regards to selling specific shares like first in, last out, last in first out. Right now I have my account set up to sell my most expensive shares first. Now for those who aren’t aware of that, there’s tax implications that go along with it.

2:16
You know, if you’re selling your first shares first, that can obviously be a benefit from a tax implication or it can help you capitalize on long term gains.

2:26
Whereas if you sell the later ones, first you might not have appreciated it to a long term status so by getting rid of those first you’re setting yourself for a tax issue to where you’re paying higher taxes in essence short term gains versus long term gains.

2:42
So he’s asking me about that. He says I mostly buy stocks to buy and hold and trade options for income. This question is specific to Micron. That’s stock symbol MU for those playing along.

2:54
He says currently, and I’m about to throw some numbers at you guys. I know it’s harder on podcast to sometimes keep up with these numbers, but I’m not going to focus so much on the numbers themselves but more of the strategy, more of the thinking behind it.

3:10
Don’t feel like you’re missing out on something. You’re right. Currently I have 300 shares of Micron, but would really like to hold about 100 shares through 2025. These shares I picked up a while ago and my cost is about $80.00 a share.

3:22
That’s the first 100 he’s talking about. The 2nd 100 I got assigned at $120.00 but with the premium I collected from selling a put, my cost is about $115.00 and I don’t want to get rid of those shares yet.

3:38
The last 100 shares I have I just got assigned last week I sold the 110 put and I bought the 100 put. So essentially he’s trying to collect premium on that Micron put but in case it goes way against him, he has 100 put that he bought to be able to capitalize on a move lower.

3:51
So I sold the 110 put for $400.00. Bought the $100 put for $79. I was able to sell the $100 put for $1100 after the sell off and after I sold it, I got assigned the shares and this is all happening around this August 5th time frame here so yeah. That’s why he was able to make so much money off of that hundred put because he did have a pretty significant event that allowed that hedge to actually make some money because during that August sell off August 5th the stock went all the way down to $84.91.

4:21
So yeah, you better bet that that 100 put that he bought was printing some serious dough for him. So, yeah, so you’re right, I was able to sell the 100 put for $1100 after the sell off and after I sold it I got assigned the shares. Now this puts my last 100 shares at a cost of around $96 a share.

4:36
I have one call sold on these shares at 106 and I got paid $120.00 to sell them. So that brings my cost down to about $95 a share on those last 100 out of the 300, so ideally I would like to sell those shares and keep them all together and make a profit.

4:49
I expect Micron’s share price to go up over the next year and I would like to sell some calls on my other 200 shares as this happens and when Micron share price gets to around 118 or higher, which I expect it to do, I will sell calls on the 100 shares that I got assigned at 120.

5:08
Allow those calls to be called away and then be left with my cheapest 100 shares of around $80 per share. So I guess my question to you is, do you think it’s smart to switch my account for most expensive shares first being the first out to having the last shares that I bought the first out for the specific trade? This is what I was planning on doing but I don’t know if I’m splitting hairs here, but there is a potential of a tax risk I’m not seeing it or just another risk or angle that I’m missing. Any advice or light that you could shed on for the situation would be appreciated.

5:35
Keep up the good work. Cheers, Jamie Cole.

5:40
OK, there’s a lot going on there with with the tax implications. And part of me doesn’t really want to get into that area because I’m not overly knowledgeable about taxes.

5:55
I mean, I do enough for myself to where I have a good idea of what I should and should not do in terms of what makes the most sense from a tax standpoint, but it’s a lot harder for me to be able to tell somebody else, especially when you don’t see the full picture.

6:09
For me personally, I rely heavily on my tax accountant. He’s the one that adds up everything, tells me what I owe at the end of each year and so forth. I don’t do that myself, so for me to try to give tax advice on that probably wouldn’t be the best idea.

6:25
But let’s go over like this position though, because I do find the position itself pretty interesting. He’s selling puts and then he’s selling cash secured puts and what that essentially is is that you have the cash to where if it goes in the money, these puts that you’re selling. So he’s, let’s say for instance, a stock trades at $100 a share and you’re saying to yourself, OK, I would be willing to buy this stock at $95 a share and you can find an option, a put option and that’s what you would be doing, you would be selling a put option at let’s say $0.90.

7:02
So you collect that $0.90 per share. So you’re essentially saying, OK, the stock drops down to $90.00. I will assume the shares, but the problem is—well before I get to the problem and the process—he’s going to be collecting $90.00 for that per option contract because it’s $0.90 per share and each options contract represents 100 shares.

7:19
So he’s collecting $90.00 a premium. The problem with that is that if—and he had it happen to him essentially—if you have a big market sell off, let’s say you’re in this contract and August 5th happens and all of a sudden you’re looking at the stock is worth only $60.00 now.

7:38
He didn’t get hit that bad. But for the purpose of an example, let’s say the stock goes from 100 down to 60. OK. That’s a 40% sell off. Pretty significant. He still has to buy those shares. He’s going to be assigned those shares at $90.00, so he’ll go into that trade. Yes, he made $90.00 off of it, but he’s lost a whole lot more because he sold that put at $90.00, which means he has to assume those shares because the person who bought it from him has the right to sell it to him at $90.00.

8:05
So now those puts have transitioned over into shares and he has an entry price of $90.00 on a stock that’s trading at 60. That’s the downside of cash secured puts. Now people will say well if you like it you’re willing to hold it long term, then you shouldn’t have any problem buying it, yeah. But you’re taking a pretty big look.

8:20
Now what he did here and it’s smart, he went and bought some puts. So in his case, you know, he sold the 110s, but he also bought 100s on Micron, so that if it did go really hard against him, at least he was making some profits off of that hedge. That hedge was protecting him from something cataclysmic happening.

8:40
And he was probably able to buy that $100 put pretty cheap, which actually he did. Based off of this e-mail here, he said he bought it for $0.79. He could have probably got it even cheaper too, and that would have been phenomenal.

8:56
So he’s got three different lots here. He has 100 lot at 80. He has another 100 lot at 115 and he has another 100 lot at 96. So on average with those 300 shares he’s probably in somewhere, ballpark figure, like $100 a share for all of them.

9:06
So now he’s like wanting to reduce his position size, which that’s a good thing. But if you start to reduce your position size, he’s wanting to know what do I sell? My oldest ones first or do I sell my newest ones first?

9:19
For me personally, I would probably want to hold on to my oldest shares for the longest, especially if it hasn’t turned into a long term position yet. Because if I’m looking to hold it into 2025, I don’t want to come up on an event in 2025 and be like, ah crap, I want to sell these things. But then I’m taking a much bigger tax disadvantage.

9:34
Had I not sold those $80.00 shares from back in the day I could actually be taking advantage of some long term tax advantages here but that’s what I would be thinking for me personally, but again, I’m not a tax consultant, so I’m not necessarily an expert on this.

9:44
But the one thing that I do want to focus on is splitting hairs. He mentioned that like, I don’t know if I was splitting hairs here. Is there a potential tax risk that I’m not seeing? And I think a lot of times as traders we can really split hairs over some things that we probably shouldn’t get too worked up on.

10:02
I would say the number one e-mail that I get probably because one, I’ve never done a episode really on it. But I still get it, especially around the April time period. And that’s the wash sale rule. And I never do them because I just want—I’m not a tax consultant. Even doing this podcast episode is a little bit of a stretch, a little bit outside of my comfort zone.

10:29
And you could probably see too, because I’m stammering a little bit more than I usually do. I mean, I still stammer, but I feel like in this one I’m doing it a little bit more.

10:32
I mean, I still stammer, but I feel like in this one I’m doing it a little bit more. But for me, for instance, when it comes to the wash sale rule, do I pay attention to that stuff? No. Do I buy stocks that I might have lost on within the last 30 days? Yeah, I’ll do it and I don’t care.

10:43
Now that might hurt me, but when I’m looking at it from a swing trading standpoint, how many trades did I make over the course of the year? And if you look at it from over the course of a decade, well, the wash sale rules, you know, we’re on triggering the wash sale rule really impact me that much if I miss out on a few tax deductions? I don’t think so personally.

11:02
So I don’t worry about it too much. And it’s one of those things too, OK, then I’m starting to alter my trading strategy because there’s been plenty of times where I’ve been stopped out of a trade and then I start to see it creep back up again and it breaks back out again and I’m like OK I’m going to get back into it.

11:17
But if I’m worried about the wash sale rule, then I’m not able to take advantage of that and so that’s what I mean by the fact that you can really split hairs at times and you can try to avoid the wash sale rule, but ultimately you’re missing out on a much bigger reward in the process.

11:28
Now for long term positions, selling covered calls I think—I like doing that. I mean, I’ve done it some, I don’t do it a ton, but if I have one that it just doesn’t really move at that fast of a pace and I feel like I’m able to collect a little bit of premium on it, even if it’s a little bit, I’ll still do it.

11:46
I mean, the worst thing that can happen is that you get your position called away and then you buy it back again at some point in the near future. You might even be able to get it back cheaper.

11:56
But another thing too is, is that selling these puts, even if you’re using hedges to prevent from like major downside risk, if you’re selling cash secured puts like what Jamie Cole here is doing, one of the things that you want to be careful of is that you’re not overexposing yourself because…

12:14
For a lot of people, 300 shares of Micron is going to be a big chunk of their portfolio. For him right here, it’s probably like $30,000. Now, if he has a $50,000 portfolio—and I don’t know what he has—but let’s just say, for example, he has a $50,000 portfolio, he’s putting himself in a lot of risk there because 60% of his capital is tied to Micron and that is a very volatile stock.

12:39
In fact, it’s one of the more difficult semiconductor stocks that I have found in my experience to trade because it’s kind of like the Netflix or Tesla. Netflix—well, I’ll back up—Netflix used to be a really weird stock, it still has a little bit of that weirdness to it to where it just doesn’t always keep in line and do what the other mega cap stocks are doing out there.

13:00
Instead, it tends to have moments where it follows its own drummer. One that’s really very much like that is Tesla. And I think all you guys would agree that thing can really do some weird things. Market can be, you know, 200 points lower on the S&P 500 and Tesla’s 2% higher. Vice versa, market could be 100 points higher on the S&P and Tesla’s down 5%.

13:23
So Micron’s like that within the semiconductors. I’ve seen it countless times where almost all the semiconductor stocks are up, Micron’s down. It just doesn’t play like the others, and for a long time it had like a two or three PE ratio that was just way, way lower than anything else out there in the semiconductor world.

13:41
So if you have a $50,000 portfolio and you got $30,000 of your capital tied up in 300 shares of Micron, getting a little bit risky. And on a day where like where NVIDIA is reporting earnings and it’s selling off and it’s having an impact on Micron, it’s going to create a lot of volatility for your portfolio.

13:56
You’re trading with a $100,000 portfolio—still 30% in Micron. That can be a little bit higher risk, so I’m guessing that might be why he’s wanting to trim back on his positions.

14:09
My thought is that he probably never wanted to have 300 shares of Micron to begin with. And so when you’re selling cash secure puts, oftentimes when people get called, they’ll go ahead and put on another cash secure put, you know, to try to sell some premium in the same stock actually.

14:26
And so my rule of thumb with that is, if I get called twice—and yes, when I do sell cash secured puts, I’m definitely using a hedge there—I’m going to buy a put way out of the money to protect myself from downside risk.

14:39
But if I get called, I’m not going to let myself get called more than twice. What a lot of people will do is once they get called, then they’ll start selling calls against those shares. And if they’re not doing that, if they can’t get an entry price on those calls that are good enough, then they’ll try to sell puts against them—more puts.

14:59
So the risk there is is that if the stock keeps falling, they’re going to essentially double down. So there’s definitely some risk there. And one thing you can’t afford is to get caught into something that’s like Walgreens, where you’re just constantly getting assigned shares because the stock won’t go up, or Peloton or something like that. And there’s always a stock every year that—multiple stocks really—that just go on these perpetual sell offs like Unity Software.

15:25
Imagine trying to sell cash secured puts on that and you’re constantly getting assigned over and over and over again. So it can be really frustrating in that point. So you have to go into it knowing, OK, I’m not going to get called on these puts more than twice before I just go ahead and close out the whole position.

15:40
Or maybe for somebody it’s four, because it’s the size of their portfolio. Maybe they’re only selling, you know, one contract at a time, but they have a big enough of a portfolio where it doesn’t really hamper it.

15:52
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16:04
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16:20
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16:35
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16:43
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16:57
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17:05
Thank you guys and God bless.

17:10
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17:17
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17:25
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17:43
If you have any questions, please feel free to e-mail me at ryan@shareplanner.com. All the best to you and I look forward to trading with you soon.