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Going back to selling puts against dividend paying stocks strategy: sold (PSEC) Aug put

Correction: I collected $89 dollars and not $75 premium as mistakenly shown in this post.
 
 

I must admit that I am getting frustrated trading spreads against SPX (S&P500). It is extremely hard trading that damn index. The market is volatile and whenever I sell calls, the market follows for a few days, then reverses and goes against me hard. So I sell puts and the saga continues. So far, I wasn’t successful trading spreads against the index. It makes me mad as a hell, really mad, but I need to stop bleeding my account.

Some time ago I wrote a post about trading options against dividend paying stocks.

In that post I wrote that it was a win-win situation trading options against dividend paying stocks. The strategy is simple and it goes like this:

 

 · Selling puts against dividend stocks

 


1) You sell puts against the dividend paying stock as long as you get assigned.
2) Once you get assigned to the stock, you start selling calls as long as you get assigned.
3) In the meantime, while waiting for the call assignment you keep collecting dividends.
4) Rinse and repeat.

What can go wrong here, right?

Honestly, I do not see many wrong goings here. If the dividend stock is a good one, the worst case scenario is that you get assigned and the stock goes lower, so you end up sitting at a losing stocks. But, your cost basis is lower than if you bought outright and you keep collecting dividends. So, who cares?

I asked myself why I even stopped doing this. Then I realized, that I was trading options against stocks which I never wanted to be assigned.

And the rule #1 here is – sell puts only against stocks you are OK to own.

I didn’t want to own those stocks, or I was trading options against stocks using margin thus I could not afford to be assigned. And when the option got exercised early, I had a margin call problem.

Then the early assignment was a problem to me. Then trading options that way became dangerous. I started losing money. And I decided to abandon that strategy.

So, I decided to resurrect this strategy and trade options against dividend paying stocks. But, this time I am really OK if I get assigned. This is a big relief. You do not have to worry about the stock price or assignment. You just sell the put option and then wait. It either expires worthless, so you are free to sell it again, or you will be required to buy 100 shares (or more if you sell more contracts) of the stock and start collecting dividends.

Since I trashed my account recently, I am at the beginning of my journey again. I have to start small and work my way up again.

So here is my strategy to start with a small account. I can only dedicate $600 dollars to this strategy. Not ideal, but I have no choice. I will sell my first contract and in the meantime while waiting for its expiration/assignment I will be saving money to be able to sell more contracts. Working it slowly back up.

If I get assigned I will not be able to start selling calls right away. Only one contract on the stock such as PSEC is close to worthless and it will make no sense due to fees and commissions. So I will keep the assignment in my portfolio collecting dividends and waiting until I save more money to sell a new contract. Once I have at least 400 shares (4 call contracts) I will start selling calls as long as I get assigned and sell the shares.

 

 · Trade detail

 

I decided to start this strategy with Prospect Capital Corporation (PSEC).

It is an affordable stock for me and my strategy and I think it is an OK stock to start with. I own this stock, I have owned it for years and I am OK to add to my position should I get assigned.

I sold 1 naked put contract last Tuesday against PSEC:

 
Sell to open 1 PSEC August 19th ’16 6.00 put @ 0.75
 

 

 · What’s next?

 

I collected $75 dollars premium. I also put aside $600 dollars in case I get assigned.

Now the trade outcomes are:


1) The option gets to 0.05 price two or three weeks before expiration – I buy it back to release money.
2) The option will have value all the way until expiration (if the stock will be trading at $6.00 a share “dancing at the floor” or around, but expires worthless – I keep the premium, release cash and repeat the trade.
3) The option gets ITM (in the money) and I get assigned – I keep the stock, start collecting the dividends and continue saving money for the next trade.

 
Here is a current record of the trade I opened last Tuesday:

 
VLO
(Click to enlarge)
 





4 responses to “Going back to selling puts against dividend paying stocks strategy: sold (PSEC) Aug put”

  1. Dennis says:

    Martin….

    That’s a great strategy. It’s one of the strategies that I’ve used for years and it’s been very good for me. I hope it’s good for you too. I wish you the best.

    Happy Trails,

    Dennis McCain

    • Martin says:

      Dennis,
      Thank you. I agree. I used that strategy in the past, but I was greedy or who knows why I decided to switch to trading SPX. When I started using this strategy a few years ago I turned my $2,000 dollar account into $28,000. Then I switched into trading SPX and lost it all. Basically starting again.
      Hopefully this time I will not act like an idiot.
      Thanks for stopping by!

  2. amber tree says:

    Looks a lot like my plan! I write puts on stock and indexes (the trackers) I do not mind to own at that price.

    I aim to do high probability trades. Trade small, trade often as they say on tasty trade.

    Good luck with our options

    • Martin says:

      I now cannot write puts on indexes as my account is small. So I have to build it up slowly to my prior highs. Same with trading small and often. I can do that small part, but often is difficult LOL.
      Good luck to you too!!

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