A Few Grind It Out Income Opportunities

Summary

  • Sell Cash-secured puts on Gold ETFs.
  • Almost everything is above 50dma and approaching overbought, covered calls are attractive on investments you plan to hold long-term.
  • Sell stocks at risk of getting their dividend cut, use the cash to sell cash-secured puts on growth stocks you’d rather own at lower price.

Retirees looking for income often fall into the trap of holding onto dividend stocks that are at risk of price decline and ultimately cutting the dividend that was desired in the first place. Using option selling strategies can generate a higher income and open up the universe of potential investments.

For those with tax sheltered growth accounts, option selling can add income without tax ramifications that can be used to buy more investments. Selling puts and calls can help multiply the compounding power of tax sheltered accounts.

Today we’ll look at a host of option selling opportunities available now. But, you can and should use the conceptual framework over and over again. 

Gold Pullback

A while back we talked about gold and gold stocks. We have been been involved with the Van Eck Gold Stocks ETF (GDX) and Newmont Mining (NEM) than anything else the past year. We made significant additional purchases of GDX in March 2020. It is my largest holding. 

One of the ideas we discussed was to add a slug of the SPDR Gold Shares ETF (GLD) to balance our gold positioning. With the pullback in gold in the past week we might be getting our opportunity to do that now. GLD is trading at about $159 now, down from $164.58.

There is a primary support at about $155. GLD is not oversold yet, so we are looking for a bit more correction.

https://www.tradingview.com/x/AYNV2UR8/

As a play on a bit more correction, I like selling the GLD January 2021 $155 puts with a limit prices from about $10 to $16. Currently those puts trade for about $7, so you are looking for a further pullback in GLD in order to capture a lot of time value on a dip with the chance to have the security put to you. I still like a ratio of about 2 or 3 GDX for every 1 GLD as I want the earnings leverage with the miners. If you want more of a balance, you can certainly go 1:1. Something to keep in mind with gold, aside from all of the arguments I laid out here:  Massive 2020s Gold And Gold Stock Bull Market Is Just Beginning

… there is a developing gold shortage on top of that. There haven’t been many major gold finds in the past decade. Among the newer finds are some in Nevada:  2 new major finds may extend Nevada’s gold boom for years

Newmont (NEM) is the largest gold miner in the world. They’re operations are lean and productive. They partner with the second largest miner in the world on Nevada operations which are among the six largest gold production complexes in the world. 

Currently, Newmont kicks out a $1 dividend for a yield of about 1.7%. I expect that to grow significantly in coming years. They’re average dividend growth rate the past 3 years according to Stock Rover is just over 40%. 

There is primary support on Newmont around $52 per share. There is very strong support in the lower $40s. The stock is not quite oversold, so we are looking for a bit more correction. 

https://www.tradingview.com/x/fkGWBtfm/

As a play on a bit more correction, I like selling the September $55 puts because I want the stock assigned to me. I am trying to get $7 in premium on the volatility and correction. I would be happy to have a net cost basis of about $48 per share.

If you are more conservative, or have NEM already, then a $45 or $50 strike price might be more suitable for you. I think you can look for a net cost around $42, so, for example: NEM September $45 with GTC sell limit at $3. 

Write Covered Calls, Trim Or Sell

 I track all of the VSL stocks, as well as, former VSL and potential VSL stocks in an expanded list over at Stock Rover. Using their screening platform, i can see what is overbought or nearly overbought pretty easily: 

Overbought
Overbought 2

As you can see, there are a lot of stocks with RSI at or approaching 70, a classic overbought signal. There are also many companies with a Money Flow Index at or approaching 80, another overbought signal. 

You can sell covered calls on virtually all of these stocks right now. You could also selectively sell or trim. 

If you are inclined to keep certain holdings, I would once again suggest long dated covered calls to autumn and/or January 2021. The stock market continues to price in a V shape economic recovery – which is about as possible as a live Elvis sighting – projecting very high valuations. 

Valuations

With COVID-19 infections trending up in 18 states now, I think it is unlikely that consumerism is anywhere near taking off again. Also, as NY Governor Cuomo said yesterday, echoing what I have been saying in webinars, there is another wave of unemployment coming soon as PPP loans are forgiven and companies are free to “right size” again. 

The most reliable indicator of a stock market correction is unemployment. Not only do the unemployed spend less, but, at some point, they start to cash in retirement plans to live on.

The cashing in of retirement plans obviously results in forced selling of mutual funds. Traders are sure to jump on the negative momentum. We shall see how much panic ensues. I expect a retest of the stock market lows by or around the November elections.

In 2008, it took about 3 months for the lag of layoffs to stock market correction to take hold. We are 2 months into large layoffs. 

While I lean towards significant portfolio trimming, bringing equity holdings down to 50% maximum of a portfolio, with 25% being reasonable as well, selling long dated covered calls to capture volatility and time value premium is also a very viable strategy. It is especially worthwhile for stocks that pay a dividend that is unlikely to be cut – make sure you are realistic about that. I am looking to sell covered calls on my remaining uncovered positions with expiration dates from Autumn to January 2021 and strike prices roughly at the money. 

A Novel Approach To Income

Many retirees look specifically for dividends. However, many of the best companies do not pay a dividend. Consider Amazon (AMZN) and Alphabet (GOOG), two of the best performing stocks of the past decade, clear market leading blue chips, but no dividend, yet, outperformed most other stocks. 

Growth stocks have led the stock market for over 20 years now. This is not likely to change anytime soon. Income investors need a way to generate income from this exceptional basket of companies. Selling options on growth stocks is a great way to do just that.

Consider this graphic: 

Option Flow Chart

One of the benefits of growth stocks is slightly more volatility. Yes, a benefit. Why? There are plenty of people buying options on speculation of a large price move and this drives premiums up. Option sellers can benefit from this reality. 

I am not saying abandon dividend stocks, but, I am suggesting to “open your range” a bit. Passing on companies with great financials and business models, just because they don’t pay a dividend (many do buybacks instead), dramatically limits you as an investor. 

In an era where change is constant, there are many midsize and large companies, well past the speculative phase, that you can sell cash-secured puts on and then write a covered call if the stock is assigned to you.

The premiums you will receive by selling puts and calls, will usually far exceed most dividend payments and lower your risk profile. You are controlling your risk in two ways. 

  1. You are receiving premiums and stocks are assigned at lower cost basis than what you would otherwise pay today. 
  2. What happens when a dividend stock cuts it’s dividend – a substantial price plunge. By getting income multiple ways – think about how real estate and small business investors look for multiple streams of income – you are diversifying your risk. 

Here are six stocks to consider selling cash-secured puts on soon – if prices fall, causing my premium objectives to be met. In general, I am looking to sell slightly longer dated puts than I normally would do, in order to get as much time value as possible leading into the fall elections. I am sure the uncertainty of the elections, coupled with the uncertainty of COVID-19 is driving premiums higher.

  • Discovery Communications (DISCA) a long-time leader in content, Discovery operates  Discovery Channel, TLC, Animal Planet, Investigation Discovery, Science Channel, MotorTrend, Food Network, HGTV, Travel Channel, TVN, DIY Network, Cooking Channel, Discovery Family Channel, American Heroes Channel, Destination America, Discovery Life, Discovery en Espanol, Discovery Familia, Great American Country, ID, the Oprah Winfrey Network, Eurosport, Discovery Kids, DMAX, and Discovery Home & Health brands, as well as other regional television networks. I believe the company is a likely candidate for a strategic transaction.
    • The October $17.50 calls have significant interest. I think you can set a limit price of $1.75 and use volatility to get a 10% premium for a partial year. You are only obligated to buy if the stock drops over 20%. 
  • SunPower Corp (SPWR) is a leading commercial and residential solar company with the financial backing of oil major Total (TOT) which is also majority shareholder. Solar is one of the fastest growing industries in the world, but option premiums are rich because of much speculation in both directions. Being an option seller is lucrative. 
    • For three years the stock has traded between about $5 and $10. If Joe Biden becomes President, I’d expect most solar stocks to break out. I like selling the $7 September puts for a buck or more (which you can currently do). That’s a 14% return to September and the “downside” is you end up with a $6 cost basis on a stock I still believe can head to between $50 and $100 in coming years (much like Enphase (ENPH) did). 
  • Enphase (ENPH) is in a duopoly with Solaredge(SEDG) for microinverters that serve the solar industry. The company is rapidly expanding into power management. The share price is volatile as it is heavily traded with options. This is one of my favorite long-term stocks to buy the dips on.
    • Our bottom fishing price on ENPH is $34. I am looking at selling November $40 puts for $6. 
  • TravelAmerica (TAoperates travel centers and standalone restaurants in the United States and Canada. This stock is on our “specturn” VSL, as it is a speculative turnaround play – so high risk. However, the company’s assets are attractive and well positioned to benefit from emerging trends in transportation. Warren Buffett is a large investor Pilot Flying J with plans to increase holdings as part of a buyout of founding families. I see a lot of similarities in the businesses and potential for the long-term. Management is the question, however, that seems to have been addressed last year.
    • Our bottom fishing price is $8 and I’d be comfortable selling the September $10 puts for $2. The option market is thin, so we could be the market on this one which presents some liquidity risk. 
  • Pulte Group (PHM) is a leader in home building. I expect a boom in home building in the 2020s as immigration picks back up, people are more cautious about living in tight cities and the Millennials raise their families. Pulte pays a 1.3% dividend that has averaged 10% growth the past three years.
    • I like the October $29 puts for $3 which if assigned would be at a cost basis of our $26 bottom fishing price. 
  • Roku (ROKU) is a leader in the streaming space, competing though with Amazon Fire, Apple TV and Google Chromecast. Roku offers the most freedom of any of the apps and I believe has the best chance to offer “streaming bundles” in the future for a cut of the fees. They also have interesting monetization opportunities via advertising. The company could be added to the S&P 500 in the coming year.
    • I like selling the October $75 puts for $9 which would give us a net cost at our bottom fishing price of $66. 

Some of these put sells will not become attractive, however, I believe most will sometime this summer. A similar strategy can be applied to many other stocks. 

If you are assigned the stock, I suggest looking to sell covered calls when nearly overbought conditions occur and the stock has moved up in price. By following this pattern, you can widely expand your income opportunities. 

Disclosure: I am/we are long SPWR, ENPH GDX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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