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New Trade – Safeway Inc. (SWY) – put selling

My previous put selling trade expired worthless netting me $220 income in premium. I still like this stock so I decided to open another naked put. But today I took a very conservative approach in selling new Safeway put.

Why? The reason is that at this particular moment I do not have enough cash to get assigned. Also the company stock price is extremely elevated and it may correct in any time and I do not want to be caught with pants down.

I was thinking about how to continue trading SWY since its options are quite expensive and I wanted to take advantage of it. So I decided to sell a very short time option and as far out of the money as possible. Once the option expires (hopefully worthless) I will rinse and repeat this process. I will start selling more expensive put options on SWY when I either save enough cash to cover a potential assignment or the stock price will not look too dangerous to sell put options against it.

The chart below shows the most recent stock price.


As you may see, the recent stock price sky rocketed. I didn’t have much time following the stock to keep up why it was happening, but I am looking at the price action from the technical perspective this time. The price gapped up and left the gap open. In some time, it will tend to close the gap, so the stock may drop.

I think that the short time option and deep OTM strike will protect me from this potential drop while still collecting an acceptable premium. The short horizontal line at $29 level indicates my strike price on this trade right at the bottom of the gap. If the stock goes lower to close the gap, I hope it will not go too low. If not I should survive the trend of closing the gap.

Trade detail

Today I opened a new trade of a naked put against SWY:

09/26/2013 09:32:56 Sold 1 SWY Oct 19 2013 29.0 Put @ 0.35

If everything goes well, this option should expire worthless. If the stock goes against me and an assignment will be imminent I will either roll the put over in a lower and longer time option or if having enough cash by then I will let the stock be assigned to me.

SWY trade history

Ultimately my goal with put selling against SWY would be to generate enough cash so I will be able to buy this stock with free money. As of today I made net $211.22 cash (enough to buy 6 shares of this stock).

2 responses to “New Trade – Safeway Inc. (SWY) – put selling”

  1. Bret says:

    I usually avoid things like this – it feels too much like “chasing” a stock. Plus, getting only 0.35 a contract usually means much of it is eaten in the trade fee. It is just too little payment for the risk taken. It can sometimes make sense if you sell at least 2 contracts, but of course that just doubles your risk.

    • Martin says:

      Bret, I disagree. There is no risk for me at all. There are only two outcomes for me:

      1) the option expires worthless and I keep 0.35 or $35 premium. After commission it is $26.21 and it is still a meaningful price to me. If I receive it every month, it is a nice addition to my dividends and contributions. As my account growths I can take two contracts, three contracts, etc.

      2) I will be forced to buy a stock at $32 a share. It is a stock I want anyway and $32 a share minus all premiums I already received (so I will actually pay $29 and not $32) it is a great buy. I am not chasing anything here.

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