Use options to build and trim positions for your ebb and flow trading style.
I am erring on the side of caution until this market gives back a little.
Still very bullish on oil stocks given manipulated supply, rising demand, lack of long-cycle investment and Iran sanctions.
You do things when the opportunities come along. I’ve had periods in my life when I’ve had a bundle of ideas come along, and I’ve had long dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn thing. — Warren Buffett
Each month, I will post a new set of option trades that you can look to make over the next month. I will focus on:
- Selling cash-secured puts on stocks that we would like to own and are approaching support.
- Covered call writing on stocks that are rallying but hitting resistance, so we can take some profits.
- LEAPs for gaining leverage on undervalued intermediate term growth ideas.
Always use limit orders and set your GTC for a week or two. Review a few times per week. It doesn’t hurt to check early each morning after looking at the stock market futures.
You can adjust prices to be a few nickels, dimes or quarters more favorable. When selling options, you want to get the ASK or a little higher if possible on volatility. When buying options, you want to get the BID or a little lower if possible on volatility.
(note: if any prices look funny, ask, there’s usually a reason, sometimes I made a mistake, usually, it has to do with expectations.)
Using cash-secured puts to accumulate a stock position is my favorite move. It allows me to create income for portfolios, ideal for IRA rollovers, get lower net cost basis and reduce my money at risk.
This transaction is best used with companies that have higher volatility as premiums are higher and we can use volatility to set attractive limit prices.
To establish an initial position I will often buy a starter position in a stock and also sell a cash-secured put for the same amount of shares, i.e. buy 100 shares and sell one cash-secured put.
For cash-secured put selling, adjust your strike prices a little lower if you already have a position in a stock and are willing to take a little less income to reduce your likelihood of adding more shares.
Remember, we don’t use margin, so these will be against your cash position. Also, if you already own a bit of a stock, only write only as much as appropriate for your asset allocation.
If I only want the stock at a significantly lower price than my cost basis on existing shares, I will often go one strike price lower than what I have listed and take a lower premium, to still collect some premium, but have less “put to” risk.
Set GTC limit orders on the trades that you most want to do. Then play with your kids or take the wife out or go fishing or walk the dog, or whatever it is you do that gives you life happiness. Check back every other day or so. And remember, you can slightly adjust the strike price up or down, depending on how much you really want the stock put to you based on your current asset allocation to the stock.
Approx Limit Sell Price (ish)
|CF Holdings (CF)||November||42.50||4|
|Coeur Mining (CDE)||September||8||1|
|First Solar (FSLR)||December||50||5|
|Kinder Morgan (KMI)||September||17||1|
|Lions Gate Ent (LGF.A)||December||22.50||2.25|
|Sierra Wireless (SWIR)||September||20||4|
|Store Capital (STOR)||October||25||2|
|T2 Biosystems (TTOO)||November||5||.5|
|US Cellular (USM)||October||35||3.50|
|SPDR Oil & Gas Exploration & Production ETF (XOP)||December||45||5|
You do not necessarily need to write these against your full position. Often writing against 1/2, 2/3 or 3/4 makes a lot more sense since you do want your winners to run. You may also simultaneously sell a portion of the position to take some profits off the table.
We do this to take profits when stocks are higher than we bought them and running into resistance or on stocks we own that are falling in price and we want to hold on but reduce our cost basis a bit.
I do NOT advocate buying a stock and then writing a covered call immediately. EVER. That is a fake strategy perpetuated on millions. You are accepting all of the risk of downside and getting no upside when you do that. The right way to sell/write covered calls is on appreciated positions that are overbought, which you are looking to take some profit on.
If you have stocks that are overbought, showing an RSI over 80, it is virtually ALWAYS a good time to write near the money covered calls. Ask me if you have a question about a particular stock. I am covering stocks here that have run higher recently. There are a lot of stocks which have run higher that you can sell covered calls on.
Let me know what stocks you own via direct message and I will add those to this list (in the Sheets stocks I cover and have some familiarity with).
|Stock/ETF||Expiration||Strike Price||Limit Sell Price (ish)|
|Digital Realty Trust (DLR)||October||125||4|
|Home Depot (HD)||November||200||8|
|JP Morgan (JPM)||December||120||6|
|Palo Alto (PANW)||December||210||21|
|Weight Watchers (WTW)||October||90||9|
I rarely hedge, however, given the reintroduction of volatility and my uncertain outlook for the economy and markets in coming years now that the Fed is starting to normalize and we appear to be at peak earnings, I am likely to hedge more. Buying puts on broad indexes and certain stocks makes sense to me off of rallies. This has worked well for me in the past.
|Stock/ETF||Expiration||Strike Price||Limit Buy Price (ish)|
|iShares Russell 2000 ETF (IWM)*||December||165||5|
|SPDR S&P 500 (SPY)*||December||280||14|
|Healthcare Select Sector SPDR (XLV)||Jan 2019||85||2|
|Consumer Discretionary Select Sector SPDR ETF||December||112||2|
* Remember when I put the SPY $280 puts in at $2 when they were $12? I said wait for a rally. Now SPY $280 puts are about $5. We’re close to a time to hedge (not speculate, just add a bit of protection). IWM has blown by the SPY lately and is ripe for a correction on being overbought.
** Folks who bought the Italy hedges at a buck are up 50% in a few weeks. I’d be holding most of the position a few more weeks, but time value is ticking, so don’t be a pig, because pigs get slaughtered.
To learn more about options please visit and study from the CBOE Education Center. Most brokerages have learning centers and webinars as well. Typically to get approved for cash-secured put selling you must tell your brokerage you have at least a $75,000 per year income, $50,000 liquid net worth and $100,000 net worth.
Also, I am focusing on the stocks and ETFs I like. If there is a company that you really want to own, learn from how I am using options to find similar type transactions on your preferred stocks.