Sell Cash-secured Puts For Income & To Build Positions

When the stock market is choppy, unless you are a skilled technical trader, your best bet is to set several GTC orders to tune up your portfolio and then, go do something fun or productive. Setting the limit orders at favorable prices eliminates the emotional aspect of trading. 

This weekend, I’ll be cleaning my house this weekend before heading off to Las Vegas to play in the World Series of Poker through the end of June. I will also be BBQing Sunday night for my newly pregnant daughter and her baby daddy (I jest, he’s a good guy). 

A Choppy Market

My basic thesis through the end of next year is that I expect choppiness with at least one good rally and eventually an outright bear market sometime next year. 

I expect the rally because:

  • people are reacting positively to the dovish talk form the Federal Reserve and other central banks.
  • the trade skirmish (trade war is so forward looking) has yet to negatively impact corporate profits.
  • the Fed is ending Quantitative Tightening in September and that will free up $50 billion per month into the economy and markets.
  • Record corporate stock buybacks will continue through the end of the year.

I expect a bear market next year because

  • I don’t expect any infrastructure or other stimulative legislation before the elections. 
  • if President Trump loses, then there will be a lot of selling to preserve gains with the low capital gains tax rates. Every poll I see suggests the question on next year’s Presidential election isn’t whether or not President Trump will lose to a Democrat, but whether it will be a close or a landslide win by Democrats.
  • the trade skirmish could turn into a trade war impacting corporate profits.
  • lower corporate profits would cause layoffs impacting consumer spending and causing forced selling of stocks from 401k redemptions. As I said before, our canary in the coal mine for the stock market is layoffs. If people lose their jobs, a large minority or small majority will cash in their 401k plans.
  • any selling, be that of those trying to capture lower tax rates or trying to survive a layoff would have a huge impact on the stock market as it did in Q4 2008 and Q1 2009 – especially given the thin nature of the stock market

In that environment, we want to use uncertainty and volatility to generate some income for our accounts and buy stocks we’d like to own intermediate or long-term at lower prices. 

Don’t Get Faked Out By Tech Trailing

All of the orders I am entering have to do with sustainability or the “smart everything world.” That is where the future lies and where most of the leadership lies long-term.

In this current rebound rally “old economy” stocks are leading. That’s an escape hatch for you to use. Trim or sell outright your “grandpa stocks” in the short run to raise cash. Old economy leadership won’t hold, just as it hasn’t in the past decade.

We can use an upside down market to our advantage. Our challenge is to manage the volatility while establishing long-term positions. 

GTC Orders I Am Setting

I am likely losing some of my SunPower (SPWR) due to covered calls I have written for June, that are currently in the money. So, I am setting a limit order to sell cash-secured puts on SunPower on a dip. 

  • selling cash-secured puts on SPWR, September $7, GTC limit $1. 

My June $30 puts for Micron (MU) appear to be expiring in a couple weeks, so I am writing new cash-secured puts on Micron. As I identified correctly here, around $30 is the very heavy support area for Micron. If we can buy it down there, great, if not, the premiums are very nice. 

  • selling cash-secured puts on MU, September $30, GTC limit $2.

* Caveat, if MU drops to $30 in the next two weeks, I would raise the limit price of the MU cash-secured put GTC order to $4. 

I sold most of my Cisco (CSCO) a few dollars ago and am having remorse because the company is just so strong and well positioned. I need a taste back. 

  • selling cash-secured puts on CSCO, September $45, GTC limit $2.

Johnson Controls (JCI) is getting close to their Support 1 level. I think it’s unlikely, short of a market crash, that stock goes much below that level. They’re a bit of a victim of the trade skirmish. Their tech is very important and their M&A is unleashing the building tech solutions unit.

  • selling cash-secured puts on JCI, September $33, GTC limit $2.

Limit Orders To Buy Stocks

If you do not sell cash-secured puts, you can use a price near the Support 1 or strike price minus premium to set a limit order just to buy the stock. For example, on CSCO set your limit price at $43 which is Strike minus premium, or $44 which is Support 1. In general, I’d set your price at the lower of those two prices and adjust later if you need to. 

Another company I am setting a limit to buy on is Lockheed Martin (LMT). Lockheed is one of the best companies in the world. It’s been very fully valued for a couple years. I missed this one even after calling it one of the best companies in the world. I’m looking to take a started position at Support 1 which is $270 per share. I don’t think we’ll get there, but that’s a placeholder piece of money for me on big corrections, so I’ll attach it to one of the best companies in the world. 

  • Setting a GTC limit to buy LMT at $270.

I already own enough AT&T (T), but if you don’t, I’d be looking to buy it on any dip to round up to a 2-4% position (depending on how committed you want to be to any single company). 

Have you seen today’s headline: 

AT&T Eyes $16- to 17-a-Month Streaming Service in Strategy Shift

This is the new revenue we’ve been talking about. It’s coming. 

AT&T’s Support 1 price is $28. 

  • Setting a GTC limit to buy T at $28.

Come to think of it, you could sell a cash-secured put on AT&T as well. 

  • sell cash-secured puts on T, October $30, GTC limit $2. 

Closing Investment Thought

Even though everything here isn’t in the tech sector according to S&P, I think you can see where technology plays a vital role for all. It is these intersections where the world grows. We can use the fact that change is scary and causes volatility to our advantage. Patience, ignoring the middle of the market, foresight, controlling our emotions and of course, a little luck, all help. Having a process helps with all of that.

“Diligence is the mother of good luck.”

Disclosure: I am/we are long CSCO, SPWR,T. 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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