Option Selling Weekly 11/17/2020


  • There are very few oversold or undervalued stocks to sell cash-secured puts on.
  • There are many overbought and overvalued stocks to sell covered calls on.
  • Duration and strike prices are up to you as you know your asset allocation, risk tolerance and cost basis.
  • In general, sell a lot of January covered calls at or near the money in my opinion.

CBOE Options Institute EducationEach week I cover a batch of option selling ideas for retirees and near retirees for income generation and risk management. Options selling is great for people with six and seven figure IRA balances or non-qualified accounts looking to generate additional income.

Broadly speaking, professionals generally sell options to the speculative public. You are taking the “house” side by being an option seller rather than a buyer.

Option Selling Education

Having a good appreciation of risks and understanding of methods is vital to using options. Please read these before starting: 

Investment Philosophy

Don’t You Dare Trade Options Until You Read This!!!

CBOE Options Institute Education

Cash Secured Short Puts – Fidelity 

Covered Calls – Fidelity

Cash Secured Put Ideas 

We are looking for two situations to sell cash-secured puts: 

  • Undervalued stocks you are looking to build a position on.
  • Oversold stocks you are looking to collect premium on. 

Sometimes those two circumstances overlap, these are the best stocks to sell cash-secured puts on. Other times it’s one or the other. Know the difference. 

In general, sell cash-secured puts 6 weeks to 3 months out, but try not to cross earnings reports unless you have a strategic plan around that. Use a strike price that makes sense for your outcome goal (assigned or not assigned) and coincides with a net cost within our buy zone. 

Undervalued Stocks (proprietary measures of margin of safety)

  • Barrick Gold (GOLD)
  • Lumen Technologies (LUMN)
  • AT&T (T)
  • Kinder Morgan (KMI)
  • Alibaba (BABA)
  • Electronic Arts (EA)
  • Pulte (PHM)
  • Northrop Grumman (NOC)
  • Newmont Corp (NEM)

Oversold Stocks (RSI or MFI in 30s or below on weekly chart)

  • Barrick Gold (GOLD)
  • Alibaba (BABA)
  • Electronic Arts (EA)
  • Kinder Morgan (KMI)

ETFs In Or Near Buy Zone

ETFs in the “buy zone” can be bought, or if near the top of the buy zone, a better idea could be to sell a cash-secured put that gives you a net cost basis at a more attractive price.

  • VanEck Gold Miners (GDX
  • SPDR Gold Trust (GLD)

Covered Call Ideas

We are looking for two situations to sell covered calls. 

  • Overvalued stocks you are looking to reduce cost basis on and are fine losing to being called away.
  • Overbought stocks you want to collect income on, but would prefer to keep and anticipate a fair chance that the stock falls a bit letting the call expire. 

When selling covered calls, I generally recommend selling on 1/3 to 2/3 of you position. If risk of a downturn is high, trim some of the stock position outright, at least as much as you’ve profited. I often put the profits in my pocket and sell covered calls on most of the rest, i.e. 2/3. The reason I don’t sell covered calls on the whole position is so I can keep some exposure if the stock keeps running higher, in which case I might sell more shares or covered calls later, i.e. scaling.

Stocks that are called away, you can always buy back or sell cash-secured puts on to help rebuild a trimmed or liquidated position. 

Option cycle

In general, covered calls should be sold 6 weeks to 3 months out, but try not to cross earnings reports unless you have a strategic plan around that. Use a strike price that makes sense for your risk management goal, i.e. lower strike vs higher strike.  

Overvalued Stocks (proprietary measures of margin of safety) 

Overbought Stocks  (RSI or MFI MFI lower over 70 on weekly chart) 

Overbought ETFs

  • iShares Semiconductor (SOXX)
  • Invesco Solar (TAN)
  • Invesco Wilderhill Clean Energy (PBW)

Closing Quick Thoughts

A lot of the stock market is overvalued and overbought or nearly. Economics don’t match up with the long trades. However, the Fed is accomodative.

When the stock market falls, it will be fast again, likely a two or three week decline of 15-30% by my math. A typical correction is generally about half the distance from the high to the prior cyclical low (March). That would equate to a (SPY) in the $270-8 range and (QQQ) in the 220-230 range.

When that happens, depending on momentum factors, I would be likely to get nearly fully invested. In the meantime, being extremely cautious and quick to take profits makes sense in my mind. Also, I strongly recommend using 7% trailing stops on most significant positions.  

Watch this interview with Jeff Gundlach and you will understand a lot of my views: 

Disclosure: I am/we are long T, LUMN, GOLD, NEM, STOR, NTR, BABA, F, KMI.

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