WHAT WE DO? WE SELL OPTIONS FOR INCOME. WE USE THAT INCOME TO BUY DIVIDEND GROWTH STOCKS!
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Posted by Martin October 24, 2020
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WHEEL STRATEGY


If you are familiar with this strategy, you can pretty much skip this post as you already know all the ropes. If you are a novice investor, this strategy may help you maximize your returns.

This strategy utilizes trading stocks and options. I use this strategy myself and it generates consistent returns.
 

Stock pick criteria
 

To trade this strategy I pick a stock that is relatively lazy (so doesn’t have too much volatility in it), trades mostly sideways or slightly up, pays dividends consistently (dividend aristocrat), and I must be willing to buy 100 shares of this stock (that means, I have to have enough money in my account to do so). The best candidates are usually utility stocks but any stock with lazy charts will do it. I also check options on that stock to make sure it has enough premiums trade.
 

Trading the strategy
 

Once you have a stock that meets your criteria, start doing the following:
 

1) Sell a put contract with delta 20 – 30 (that will determine your strike price), a premium of 0.30 ($30) or more, and 45 days to expiration or shorter if you can get the same premium.
 

2) Reinvest the premium and buy one share of the stock you traded (if the premium is less than the stock price, leave it in cash).
 

3) If the stock stays above the strike price at expiration, it will expire worthless, you keep the premium, and go back to step #1 above.
 

4) You may apply a 90% rule which means that you buy back the option once you achieved a 90% premium, e.g., you sold the option for 1.00 ($100) and buy it back for 0.10 ($10). This means you skip step #3 above.
 

5) If the stock stays below the strike price at expiration, you may attempt to roll it into the next expiration day and the same strike, or into the next expiration day and higher, as long as the roll is a credit roll. If this is not possible, let the option assign and buy 100 shares of the stock.
 

6) Once you have the stock, sell a covered call option. Make sure your strike is above your cost basis. For example, if you were assigned at $30 a share, make sure you sell the call with a strike price of 30 or more. Note, there will be situations when the stock drops so low that this will not be possible, but there are strategies to go around this. If interested, I can write about it in another post.
 

7) Reinvest the premium from covered call trade and buy another share of the stock. Also, in this period, you will start collecting dividends. Reinvest the dividends to buy more shares.
 

8) If the stock stays below your call strike price at expiration, the call will expire worthless and you can go back to step 6 above.
 

9) You can also buy the call back once you reach 90% profit on the call and sell a new call with the next expiration day, (i.e., skip step 8 above).
 

10) If the stock ends above your short call at expiration, you can roll the option into the next expiration and same strike, or the next expiration and higher strike as long as it will result in a credit trade.
 

11) If the roll as described in the step above is not possible, let the call assign, and sell your shares. If done as described above, you will make a profit on the calls and on the stock. Once you have no shares, you can go back to step #1 above.
 

That’s it. If done correctly, this strategy is almost invincible and you will be making nice profits. If you need more help, let me know.




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Posted by Martin October 19, 2020
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Vaccine and stimulus


Stimulus hopes before the election fade away and investors are dumping stocks (but wait, they will be buying it back like crazy when the hopes renew after the election)…

A good start on vaccine hopes diminished on the stimulus failed hopes. But who knows what the hopes are. It is all that media make always up to come up with to justify the market price action.

My view is that every storm on Wall Street is a storm in a spoon of water inflated by media and panicking investors who are extremely short term oriented. And many lose money because of it which boosts their “I told you so” posture when talking about the markets.

Ignore it, execute your plan and you will perform better. A lot better!




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Posted by Martin October 18, 2020
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October 16, 2020 expiration


We had a few options positions expiring last week on Friday, October 16:
 

PPL – Oct 16 (monthly) 29.00 call for +0.35 – WINNER
STOR – Oct 16 (monthly) 25 put for +0.68 – WINNER
 

All other trades were rolled into November expiration day.
You can check our open positions on our Trades & Income page.

Last week was successful in spite of the market decline which I have expected anyway. It allowed us to roll a few trades into a better strike, for example, our IWM trade which went up so much that we weren’t able to roll it higher fast enough.
 

We generated $167 dollars in options premiums last week and $98 dollars in dividends. All income was reinvested into new stock positions according to our plan.
 




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Posted by Martin October 17, 2020
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Why I like investing and trading in the stock market


1) You can generate great returns
2) You can treat investing and trading as your business
3) You do not need customers
4) You do not need supplies
5) You do not need any marketing looking for customers, and keep them happy mainly when they do not know what they want
6) You do not have to deal with competition, there is none
7) You do not need any manufacturing, rent buildings, offices, warehouses, you do not need a third party like Amazon to sell your product
8) You do not need any product, after all, you do not need to spend time searching what to sell, what to make, what to manufacture, and you do not need to beg for startup money
 

All you need is a computer or laptop, a brokerage account with full trading privileges, and $2,000 to start with. You are free, you have no boss, no partners, no investors to answer to. You have full-time freedom.
 

People think investing and trading in the stock market is a bad proposition because the market only makes 8% a year… Those who claim and believe this probably never actively traded in the market and have no clue what they are talking about. These people should stay away from the market because thanks to their own false beliefs they predetermined themselves to failure before they even started.
 

I am not a guru or great in investing and trading. I make mistakes, but I believe in tremendous freedom trading offers. I started trading in 2014 and averaged 45% annual returns except 2018 and 2019 where I had losses of 33% and 24% respectively. However, 2020 was a very good year. Despite covid troubles and selloffs, I am currently at 157% revenue.
 




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Posted by Martin October 15, 2020
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Cup and handle in making?


As expected, the market topped in a parabolic run-up a few days ago and retreated.

It is possibly creating a cup and handle formation and if completed and correct, we may expect another leg up:
 

S&P 500
 

Cup and handle and all charting is not an exact science. But if we take into account what an ideal cup and handle looks like, or should look like, the market is currently behaving to confirm this pattern.

When we create a cup, the handle should be about 30% of the rally from the bottom of the cup. So, if we agree on the bottom to be at 3230 level (again, not an exact science), and the top of the cup at 3550, then 30% of this rally is 96 points (3550 – 3230 = 320 * 0.30 = 96). Subtract 96 from 3550 and you get 3454 level.

Today, the market dropped to the 3440 level and bounced back up. If this level holds and the market starts going higher, we can conclude that we had a successful cup and handle formation and we would go higher from here.
 




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Posted by Martin October 13, 2020
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Did the market sprint to finish today?


The stock market can be compared to a sprint in athletics. When runners are running they run at a constant speed but as the finish line nears they start adding speed and take their reserves of energy to sprint faster to the finish line.
 

Bullish Twist
 

Yesterday, the market started showing the signs of a sprint. Today, we stalled and we had a 0.61% pullback. Is this a beginning of a bigger pullback or just a blip? I want to think we will see more and I wish we do as I have a few positions which I would like to adjust and a pullback would offer a great opportunity to do so.

But, we would have to wait and see what this market wants to do next.

 

S&P 500
 




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Posted by Martin October 12, 2020
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Another parabolic craziness


The stock market, fuelled by hopes and wishes about more stimulus and more free money poured into the system, is going crazy. And the market loves free money and wants more of it.
 

Bullish Twist
 

As a dividend growth investor, I do not mind this behavior. There are still companies that are undervalued even in this crazy market. These companies do not participate in this crazy rally which is driven by tech stocks only. The rest of the market is churning its way up (or down). For example AT&T (T). In my opinion, this stock is undervalued and offering a nice potential return of 60.7% (23.80% annualized) with a growth of 43%. The rest is dividends.
 

ATT stock analysis
 

Will it happen? I hope so. But it may not. In this case, I use the position monetization to make money selling options around the position and lower my cost basis. If I lower my cost basis low enough, any fluctuations of the stock do not matter anymore. And at some point in the future, most of the stocks reach a level where the gains are irreversible.
 

And this market is on it again. Rallying hard killing all bears on the way. But this rally is once again a parabola in making. The 10% correction we saw a few weeks ago was nice and healthy. The recovery from it is horrible and stinky.
 

ATT stock analysis
 

What can we expect?

1) We are creating a cup and handle and we may see a pullback before we continue higher.
2) This is a crazy, parabolic move, and we will create a double top and crash again. However, double tops are rare events unlike the popular belief in them.
3) The craziness will continue, the market smashes through the previous highs and keep going higher.

I do not want to predict any of the outcomes. I have no clue what this market is going to do next. My feeling is that we will pullback again. But how much and how deep? I do not know.




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Posted by Martin October 07, 2020
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Why do so many people selling puts fail?


Maybe, you are one of the people who got excited and started selling put contracts against stocks or even dividend stocks and failed.

I was there too. I was selling as a hell. I was selling puts a lot. And I failed too. Many times. I lost tons of money selling puts. Then the puts got in the money, I couldn’t roll them, got assigned, and I didn’t have money in my account to handle the assignment. I had to close the position at a loss.

Why do so many people fail?

The problem is in overdoing this type of trading. Many people sell too many puts beyond the ability of their accounts to handle it. If, for example, your account is a $5,000 net liquidation value and you sell put options worth $30,000 of net liquidation value (yes, it is possible with a margin account), then you are in trouble. And you are irresponsible and have no place in the stocks market.

Solution?

Sell only so many puts that if you get assigned, you can hold the position.

But, if you are impatient as I am, what can you do to ensure that you do not over-trade your account? Also, believe me, it is very easy to get overboard when in a margin account. I set aside the money I need for the assignment. In the past, I found this rule horrible and ridiculous. Why would I let free money sitting in an account doing nothing? I can invest them and make more money! Yes, you can. But then you are doomed over-trading your account.

In a margin account, I found it easier to set aside money in a margin account than in a cash account. In a cash account, the broker actually does it for you and if you have a small account, it will take years of savings for you to be able to start trading options due to extensive capital requirements. In a margin account, you only need 50% to set aside (of course, it fluctuates but we can discuss this in another post).

So, let’s say, you want to start selling put options against Coca-cola (KO) which trades for $49.56 a share. To buy (or be assigned) in a cash account, you would need $4,956.00 to cover the assignment. In a margin account, you would only need $2,478 cash to cover the assignment. Save that money aside and you can trade puts against KO without fear of being assigned and not having enough cash to cover that assignment. And, I found a way of saving that cash in my account and be comfortable with it.




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Posted by Martin October 06, 2020
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Where Do You Keep Your Money In The Current Low Interest Environment?


I mentioned this topic in my previous post. But since then I developed this “cash storing” a bit beyond the original post.

In the older post, I mentioned that I was buying a short-term bond ETF which was able to keep the value consistently over time. Even during the 2020 stock market slump, it dropped only 4% while the entire market dropped almost 40%. And, it recovered fast.

On top of this feature of preserving value, it pays a nice dividend, yielding about 2% (or slightly more). Definitely, a lot better than the current high yield interest savings accounts pay. Why saving money in a savings account that pays you barely 0.80% annual interest, when you can use this ETF and get 2.20%?

However, I did a bit more search to find what other similar ETFs are there available. I found an article on Seeking Alpha providing me with a better insight into this type of savings.

And that led me to create a savings plan and abandoning savings accounts:
 

SPY LEAPS trade
 

Is saving in this type of investment safe compared to a savings account?

If you believe that the stock market is flawed and everything, even bonds, and Treasuries, are doomed to an irreversible crash, then stay with a bank and their products when they borrow money from you, pay you 0.80% annual interest rate, and then charge you 16% annual rate on credit cards or other types of loans (if you qualify in the first place). Just make sure, these same banks survive that irreversible market crash.

I personally believe that these types of ETFs are relatively safe. Just look at the long term chart of those ETFs. The price fluctuations over time are minimal and well offset by the dividend.




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Posted by Martin October 05, 2020
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#004 Trades opened today


We have added a few more trades today to our accounts:
 

Bought 1 SPY Jan20 2023 (LEAPS) 335 call for -44.30 debit
Sold 1 SPY Oct 9 (weekly) 348 call for +0.42 credit
 

We completed our goal in our account and saved enough buying power to buy LEAPS against the SPY index (3 years expiration). The premise of this trade is that in three years, I expect this market to be higher, a lot higher, even with corrections and bumps on the road (possibly we get at $400 or higher in the next three years). If that happens, our LEAPS call will be worth $90.9 per share, which means we would more than double our money. Our investment would go from $4,430 to $9,090.

But, we will not sit tight on this trade, we will also start selling covered calls against this trade. We sold our first weekly covered call and collected $42 credit. At current prices, we can collect around $40 per week or $120 per month. If we happen to collect that amount, during the lifespan of our LEAPS, we should collect an additional $7,900 in premiums in the next three years. Our total profit would then be $12,560 in three years or 283%.
 

SPY LEAPS trade
 

Roll 1 IWM Oct 30 (weekly) 153 call to Nov 6 (weekly) 154 call for +0.63 credit
 

Markets continue higher in a strong rally which made our IWM covered call in the money. We decided to roll the trade higher and away in time. However, we rolled an in the money call to in the money call. We will be slowly rolling higher and tracing the market until the call gets out of the money.
 

IWM roll
 

Bought 4 T shares @ 28.66
 

Roll 1 PPL Nov 20 (monthly) 28 call to Jan 15 (monthly) 28 call for +0.42 credit

Our poor man’s covered call is not working as wanted, so we rolled our short call to January expiration, making our PMCC trade a regular vertical call spread. In January, we plan on converting this trade to short put trade.

 

PPL roll
 

Roll 1 BAC Oct 9 (weekly) 24.5 call to Oct 16 (monthly) 25 call for +0.11 credit

Our covered call with 24.50 strike got in the money and we only had 4 days to expiration. We do not want to give up our shares so we decided to roll the trade higher and one week away. We collected a small credit.

 

BAC roll
 

 

You can see all our trades on Trades & Income page.




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