Option Selling Ideas

Summary

Selling puts this month could be a boon if there is a small correction and volatility.

We will want to be aggressive put sellers into the buyback bubble that is blowing into year-end.

I am not too keen on buying calls right now, that seems a time for a bigger correction.

Selling covered calls on bigger positions that have RSI near 70 is always a good move.

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

Options

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.
  • Hedges.

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.)

Cash-Secured Puts

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.

Stock/ETFExpirationStrike Price

Approx Limit Sell Price (ish)

Antero (AR)January202.50
Calix (CALX)January81.25
CenturyLink (CTL)January212
Coeur Mining (CDE)January61
Encana (ECA)January121
First Solar (FSLR)January505
Kinder Morgan (KMI)January171
Lumentum (LITE)January555
Micron (MU)January455
Nutrien (NTR)January554
SunPower (SPWR)January71
Sierra Wireless (SWIR)December203
T2 Biosystems (TTOO)February7.502
AT&T (T)January332
Verizon (VZ)January503
SPDR Oil & Gas Exploration & Production ETF (XOP)February455

Covered Calls

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.

You are largely on your own with covered calls as there are too many to cover. That said, you should be looking to sell covered calls when RSI (14 day) approaches 70. That is when the stock is becoming overbought in most cases. You will also want to look at breakout levels. If a stock is breaking out, you might want to wait to sell covered calls.

I am very cautious to sell covered calls unless I can somehow anticipate or forecast that a lull in appreciation might be coming. Sell the news types of events. Momentum spikes that looked played out.

Options CycleLEAPs

LEAPs are long-term call options appropriate for replacing part of a stock holding in order to gain leverage. The 2019 LEAPs are higher risk due to shorter duration – caution.

Stock/ETFExpirationStrike PriceLimit Buy Price (ish)
Coeur Mining (CDE)Jan 2071
Micron (MU)Jan 205010
SPDR Oil & Gas Exploration & Production (XOP)Jan 20405

Current Note

Notice the very, very short list of LEAPs. Per the Quarterly Outlook, I’m not so sure that we want to put the clock on our positions.

Hedges

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/ETFExpirationStrike PriceLimit Buy Price (ish)
iShares Russell 2000 ETF (IWM)*December1655
SPDR S&P 500 (SPY)*December2905
Healthcare Select Sector SPDR (XLV)Jan 2019952

Current Note 

The hedges are short-term swing trades. Similar to those from August. These are aggressive positions that should not be over allocated. These are protection from a few really bad days that you would take profits from quickly. It is okay not to use hedges as they require daily management. Sometimes just waiting with cash and limit orders is the better thing to do.

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Make sure to read:

Accumulating Positions And Trading

&

How Low Can The Stock Market Go?

And here’s a good resource:

Optionable ETFs for Every Investment Objective | ETF Database

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* I always use the monthly options, not the weekly, however, if you can find a liquid option on the weeklies with better pricing, have at it.

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.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

Additional disclosure: I am looking at doing all of these option trades if the price is right.

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