Option Selling Weekly 12/22/2020

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.

Before you get started, make sure to visit our article:

Selling Covered Calls & Cash Secured Puts

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.

  • Usually, we take a starter position in a stock and then sell a cash-secured put with a slightly lower strike price to build the position more at a lower cost basis (if option assigned), or simply to collect premium against the starter position (if option expires).
  • Option dates are the monthly expirations, unless specifically dated for a week.
  • Sell cash-secured puts four to 11 weeks out, but try not to cross earnings reports unless you have a strategic plan around that.
  • Consider ex-dividend dates.
  • 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.
  • Set your sell price appropriate the stock’s volatility and always try to get a little more than the current ask price using a limit order, i.e. let the volatility work for you.
  • For the most part, stick with the stocks and ETFs on our quarterly updated Plug & Play portfolio models. These picks are from recent Plug & Play.

Top Cash-secured Put Ideas this week:

Company & SymbolCash-secured Put Option Trade
Barrick Gold (GOLD)February $21 – if you already own it, Feb $23 if you don’t. Barrick is our top non-U.S. gold stock and must own for firm to bullish gold prices.
Lumen Technologies (LUMN)February $10 – would be assigned before next ex-dividend date. Ideal for adding to existing position or along with an initial starter purchase as LUMN is in our buy zone.
AT&T (T)January 8th $30 – to be assigned and get next ex-dividend date. Ideal for adding to existing position or along with initial starter purchase as T is in our buy zone.
Merck (MRK)February $75 – might not be quite there yet, but as price approaches $76, I think you can pull the trigger. Be looking for premium of about $3.
Kinder Morgan (KMI)January $15 – in the money designed to have the stock put to you. KMI pays a large dividend, gas pipelines are valuable and there is likely M&A in the future.
Alibaba (BABA)February $235 – a must own international cloud play and our proxy for China. You can use a higher strike price, to increase annualized return, however, that increases the risk.
Berkshire Hathaway (BRK.B)February $220 – lower risk with Berkshire buying back shares on correction. Long-term attractive with recent moves into tech, more gas pipelines & international.
VanEck Gold Miners (GDX)February $34 – looking for about $2 in premium on volatility to get net price of $32 if put to you.

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. I also strongly recommend using 7% trailing stops on most significant positions that are uncovered.

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
  • Usually do not sell calls against an entire position as we need to allow our winners to run in case overbought becomes more overbought. It’s typical to write calls against 50%-80% of a remaining position after any trimming.
  • In general, if you are selling covered calls, you should consider trimming the position outright, 20%-30% trimming is common to take profits.
  • Option dates are the monthly expirations, unless specifically dated for a week.
  • Sell covered calls four to 11 weeks out, but try not to cross earnings reports unless you have a strategic plan around that.
  • Consider ex-dividend dates.
  • Use a strike price that makes sense for your outcome goal (assigned or not assigned) and manages risk appropriately for you. These covered calls can be set a bit higher or lower for strike price depending on you.
  • Set your sell price appropriate for the stock’s volatility and always try to get a little more than the current ask price using a limit order, i.e. let the volatility work for you.
  • For the most part, stick with the stocks and ETFs on our quarterly updated Plug & Play portfolio models. These picks are from recent the Plug & Play.

Top Covered Call Ideas This Week:

Company & SymbolCovered Call Option Trade
Cisco (CSCO)January $45 – hitting volume resistance
Disney (DIS)January $170 – very overbought in a maniacal way. Theme parks won’t be full until summer or autumn.
Freeport McMoran (FCX)January $25 – overbought and coming off, likely head back into teens, trim some too.
Microsoft (MSFT)February $220 – overbought, few buyers, could head to around $200 pretty easy.
Micron (MU)January $70 – overbought, like many semiconductor stocks, likely fall to lower $60s soon.
Roku (ROKU)January $350 – overbought, could very well head back to $250.
Starbucks (SBUX)January $100 – coming off of overbought, pretty strong support around $83.
SunPower (SPWR)January $28 – love the company but is parabolic right now, could head to lower $20s pretty easily.
Square (SQ)January $220 – overbought, could run to $290 or fall to $200 in a heartbeat.
Ark Innovation (ARKK)January $140 – overbought holdings vs great management. If I still owned it, I’d find a way to take some profits off the table.
Invesco Solar (TAN)January $100 – pretty easy to see it at $85 again.

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 accommodative.

You can get more of my big picture ideas reading my Macro Monday pieces. Here’s the latest: Macro Monday: Change Within Change (Year-End Q&A Webinar Announcement).

When the stock market falls, it will be fast again. I expect the next correction last about a month with a decline of 15%-30%. A typical correction is generally about half the distance from current cycle low to high. That would equate to a (SPY) around 300 and (QQQ) near 240.

Of course, we might just see those indexes muddle along the top of the “megaphone” I have been tracking and go higher until there is an event of some sort.

You’ll see my 2024 target for SPY is lower 500s. That would mark about a 25% increase from today’s overvalued levels. So, while “the market” might not be exciting in coming years, it should still rise, but with volatility. It’s imperative we use that volatility to our advantage. Selling options is a great tool for that.

Here’s this week’s options discussion:

Related Articles

Q1 2022 Plug & Play ETFs

Our core ETFs to use this quarter to build your portfolio. Weekly updates found in Global Trends ETF articles that will include new funds and potential trades, as well as, when to buy, sell, add and trim for profits. Join Global Trends ETF service for access to our highly sought after ETF asset allocation and trading. Also included with all stock memberships.

2022 Forecast Review & Update

Here is my midyear review available to all subscribers. It covers my thoughts on how accurate our forecast was, the strength of our cash position and what to do with it soon. Holdings included for my aggregate managed accounts.

close

Get alerts when we publish a new idea!

Get Our Investment Ideas
Fully Confidential