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Posted by Martin March 15, 2018
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Too many predicting bear market


Sell!Everybody is going bearish these days and our economy and politicians are not helping much. Retails saw three consecutive months of slowing sales and tomorrows data will probably help sinking this market lower. Trump fired another of his advisers (as I read on Investing.com: making this Presidency a joke) and futures sold off.

However, among all this weakness, the market overall still holds 50 day MA and it still is on its path higher. But practice caution as all this may change quickly (as quickly as tomorrow).
 

Even with all the weakness and selling we made great income today. Most of the time I rolled put spreads away and lower and kept selling call spreads. I still must exclaim: I love this volatility as it brings a lot of opportunity to make money. The catch is, many of the trades are still open and all premiums we collected so far can evaporate if we will not manage those open trades properly.
 

More and more stocks are becoming cheaper these days and as more selling hits the market more good quality stocks will be cheaper to buy. I stick to dividend growth investing strategy, use 50% of the options trading proceeds to buy dividend aristocrats. I am happy to see this weakness in the market as I can now buy stocks such as Boeing (BA) which is shown as undervalued. Check our list of stocks our system indicates as a good buy.
 
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Posted by Guest October 19, 2017
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Does Seasonality Affect Stocks?


When analysts examine stocks, traditional forms of due diligence dominate: fundamental analysis, technical chart analysis, macroeconomic analysis, and even sentiment analysis.

If you are an investment management firm looking to get an edge on your competition, it makes sense to conduct discounted cash flow analysis and extensive research. After all, you have extensive resources at your disposal – top notch analysts – to crunch the numbers on lots of companies.

As a retail trader, you probably don’t have the time to build out the complex spreadsheets needed to hone in on precise company valuations, so coming up with your own unique twist of chart indicators may be the best bet. After all, you can easily spot resistance and support levels, spot triggers that signal buy and sell signals with free stock rating software.

Some analysts will even rely on sentiment analysis to figure out when stocks are overvalued or undervalued according to extremes in sentiment. For example, when the volatility index skyrockets, history shows it is often correlated with a temporary market low.

Billionaire investors, such as Ray Dalio and Jim Rogers, are well known to examine macroeconomic factors to make big decisions on which way markets will move over the coming months and years.

But what if you have used some combination of fundamental, technical, sentiment, and macroeconomic analysis without success? Is there any other analysis you should be considering?

Seasonality analysis is an increasingly popular form of market analysis because it isn’t a subset of the other forms of analysis. The way seasonality analysis works is that at certain times of the year some stocks have a tendency to rise or fall with fairly predictable patterns.

A company that serves tax clientele may rally in anticipation of higher revenues around tax season and fall when the seasonal spike has ended. A company building swimming pools may rise in anticipation of spring and summer demand from customers but winter will generally be a slow season and share prices often reflect these seasonal swings.

To figure out the seasonality of stocks by yourself is quite the challenge. You would need to analyze each stock at each time of the year and how it moves historically over the coming weeks and months, and constantly update your spreadsheets for thousands of stocks each day. Obviously, it quickly becomes impossible!

But there are ways to spot and screen seasonality with relative ease. For example, a company like Masonite International [DOOR] has a history of falling on average approximately 6.0% over the weeks from the middle of October to the middle of November in six of the prior seven years.

 
DOOR
 

Obviously, there is no guarantee that any company repeats its seasonal chart pattern behavior on any given year. But some stocks, like AMD, have a history of falling with high predictability by large amounts at a certain time of year. Still others rise more often than not at the same time of year. So, if you are looking to move the odds in your favor, when you see a stock has a history of moving nine years out of ten or nineteen years out of twenty in one direction, it is certainly worth paying attention to the seasonality trend.

After all, would you really want to buy a stock that has a history of falling by a large percentage amount over the next month or two? The reason seasonality is so valuable is that if you were to view a technical chart, the share price of a stock may be in an uptrend, but a big risk may be on the horizon. Where other forms of analysis are valuable in their own ways, seasonality is valuable at knowing when the risk of a big drop or a big rise in share price may historically have taken place, and may translate to future share prices too.
 

Avatar Jack Davis is a writer at Financhill, a website dedicated to providing free stock ratings and seasonality analysis.

 




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Posted by Martin February 09, 2017
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January 2017 options income


Trading options in January ended very well. I definitely didn’t expect such results. At first it was slow and much of our cash was tied to other trades and I didn’t expect freeing them for trading. In fact, they are still blocked by those trades.

I expected barely $1,200 income, although I planned for $1,500 for this month. However, when It looked hopeless many great opportunities showed up and we were able to bank $2,468.87 dollars of option income. Very unexpected!

 

 · Options Trading Strategy

 

Over time, our options trading strategy developed from selling naked puts to SPX Iron Condors (which caused me losing money big), back to selling put contracts against dividend stocks all the way to today’s ATM strangles using weekly options.

Trading strangles is a different strategy than selling naked puts. With strangles a trader needs to trade short term contracts so you give the market little time to go against you. A strangle requires constant adjustments. Because of that, you do not want to be stuck with 30 or 45 days contract watching you trade going deep in the money. When a trade goes against you, you want to adjust by rolling and you do not want to roll another 45 day ahead and be stuck in a 90 days trade, for example.

That’s why I trade short term ATM or near the money strangles and adjust every week. And the more I trade strangles, the more I love them. If you want to learn more about how I trade strangles, read my previous post about it. I still owe you my post about how I adjust my strangles but in a nut shell, look at the strangles this way:


 

 

Are you Ready to Trade?

If you like results of our trading open yourself an account with OptionsHouse.com and start trading with a low commission rates + free virtual trading tool!

Your new trading account will come with a paper money account and will be immediately funded with $5,000 of virtual money for you to test the options trading and if you join our trading group on Facebook you can get a guidance, ideas, and trading education. Before you commit your real hard-earned money you can use the virtual account to test our strategies, learn, and ask all questions you need to learn options trading.

Once you learn and get ready, start trading live account and earn monthly income similar to ours. And we will be happy to assist you with that.

Seize the opportunity. Open a new OptionsHouse Account Today! Open and fund an OptionsHouse account to receive up to $1,000 worth of commissions on online trades for 60 days.
 

 

Imagine that the put and call contract is a bracket and that you want constantly keep the price of the stock in between the brackets. Any time, the stock moves away from those brackets you want to adjust the trade by moving the brackets “up or down” to contain the price back in. Usually the untouched side can be bought back worthless and once that untouched side is gone you are free to roll your touched side as needed to capture the stock price. I will write more about this strategy in my next post.

This means that we will most likely be in a constant trade on one or the other side (either a put or call side). But I am fine with as it is like a game to me. And I am a playful guy.

What is our goal trading options?

I said that many times and I will repeat it again and again (to myself). I learn to trade options to create a constant and reliable source of income which I can invest into dividend growth stocks.

For this reason, my strategy is also tailored to be mechanical and eliminating any emotions and second guessing. I know what I want to trade, how, and when. And I do it every week. And it is the same thing, same trade methodology, and same execution every week. This allows me to ignore any noise in the market and not tremble in fear “what if I open a trade and it goes against me”.

 

 · Options Trading Results

 

As stated above our trading in January was really great and we made $2,468.87 dollars.

Below you can see all data and progress in our trading account:
 

Month-to-moth trading results

Trading results
 

(The red dots on the chart indicate income estimate, blue bars actual earnings.)
 

In January we made: 34 trades
Total trades in 2017: 34 trades
January 2017 options trading income: $2,468.87 (72.06%)
2017 portfolio Net-Liq (net)*: $4,580.66 (+33.68%)
2017 portfolio Net-Liq (gross)*: $25,080.66 (+9.40%)
2017 portfolio Cash Value (net)*: $24,720.33 (+24.61%)
2017 portfolio Cash Value (gross)*: $45,220.33 (+24.61%)
2017 portfolio Equity (net)*: $33,602.33 (+18.81%)
2017 portfolio Equity (gross)*: $54,102.33 (+18.81%)
2017 Liability/Debt: $20,500.00 (0.00%)
2017 overall trading account result: +33.69%

* The numbers marked as “net” and “gross” are results with loan (liability) included (gross) or excluded (net).
 

 

 

 

 · Option trades review

 

In January 2017 we traded stocks which provided good trading opportunity and great premiums.

 
Here are results of the individual trades we traded this month and my comments:

 

ESV

Options Income
(Click to enlarge)

ESV no longer offers premiums I like to see and to take a risk for. In order to bring an income from this stock I would have to trade long term (more than 45 DTE) trades and that is not what I am interested in.

This stock also no longer meets my trading criteria so I am no longer actively trading this stock. However, I am still sitting in a long term trades I took in 2016 and managing those trades hoping they soon will end.

In 2016 I had to take an adjustment and roll a few of my calls higher as the stock jumped up. I also had more calls than puts in this stock and this month, I decided to balance this trade. So I sold 6 new naked puts for this stock. If everything goes well, in June 2017 I should be able to unload a portion of this stock.

I was assigned to 200 shares of ESV in 2016 at $11 a share. As of now, the stock is trading above $11 a share and I hope, in June 2017 I might be able to let my calls assign and sell the shares.

 
LULU

Options Income
(Click to enlarge)

LULU is another trade I decided to trade no longer. I collected nice premiums since I started trading this stock ($3,844 total income), but the stock doesn’t meet my trading criteria (and it never has) so I decided to stop trading this stock.

As of now, I only manage the open trades until I will be able to close them all and be done with this stock.

 
MNK

Options Income
(Click to enlarge)

MNK is another stock I no longer want to trade but must wait for it to be able to close it. There is no problem with the stock, I do not have any trouble with it, I just need to wait as those trades are also long term trades.

In January 2017 the stock offered an opportunity to adjust the existing trades without rolling them further away, improve the positions, and collect more credit. Thus I could open a few put trades to balance my open trades. I had only puts in one month and calls in the other month, so I added calls to my existing put trades and puts to my existing call trades converting them all to strangles. This operation had no impact on options buying power and delivered nice credit too. It also allowed me to lower the put strikes.

Nevertheless, I no longer wish to trade options using this stock so I will be managing the open trades until I will be able to get out. But no active trading anymore.

 
WYNN

Options Income
(Click to enlarge)

WYNN is another trouble maker stock for me. It is overly volatile and I am terribly overexposed in this stock. I was thinking how I can reduce my exposure in this stock without taking large losses. I think I finally came up with an idea how to offset the losses.

First, I moved the options expiration far, far away so I didn’t have to deal with this trade and be able to focus on other trades. So I moved it into January 2019. Not optimal, but I did it when the stock crashed hard when Chinese officials announced limiting ATM cash withdrawals in casinos in Macau and other resorts. WYNN crashed more than 10% in 15 minutes. It happened in November 2016 and I had to take some losses. But I also decided to move the stock away so i didn’t have to worry about it.

Today, I have to deal with it again as the stock went up on (in my opinion bogus) earnings results in Macau. The WYNN resort missed badly in the US but in Macau the results were good. The stock jumped way above my calls. In my previous adjustments I managed to have 100 strike calls and 82.50 & 85 puts. Now the stock is at 103 a share.

I do not believe this stock would go higher, but I may be wrong. Nevertheless, this gives me an opportunity to unload. So I used profits from other trades and offset losses when closing some puts.

I bought back one 82.50 contract for approx. $1,100 debit, used $930 dollars profit from another trade to offset the loss and then rolled one 100 call strike up to 125 strike call and sold a new 82.50 put against it. I collected approx. $175 dollars credit doing so. This adjustment then cost me zero dollars and had a positive impact on my buying power. I will continue doing this in the coming months and unloading puts. When the stock crashes again at some point in the future, I will start unloading calls.

After I unload, I will be done with this stock too. In the future, I may decide to trade 1 or 2 contracts, but not now nor near future, though.

 
STX

Options Income
(Click to enlarge)

STX is a stock which meets my trading criteria perfectly and I keep trading this stock actively. I will trade this stock as long as it performs. When it stops performing, I will start looking for a new candidate.

I keep trading short term, weekly strangles, keep them near the money or even sell at the money strikes. When one side gets deep in the money, I keep rolling the trade using straddles or inverted strangles.

Recently the stock reported earnings which beat estimates and the jump in price derailed my trading in this stock a bit so I had to roll my extremely deep in the money up and four weeks away instead of weeklys. I also had to sell deep in the money puts to be able to move the calls up. But I am OK with it as today I keep adjusting and rolling the trade lowering my puts and keeping the calls near the money (as of today I am in an inverted strangle).

In total, I was able to collect $5,002.50 dollars in premiums since I started trading this stock.

 
X

Options Income
(Click to enlarge)

X is another stock I like to trade actively. It meets my criteria perfectly and I was able to trade weekly expiration strangles against this stock. Lately, when the stock was drifting down, I was rolling puts down while my old calls were being closed for profit and I could sell new calls to help offset debits when rolling puts.

This strategy works perfectly when the stock behaves non-violently. It can be selling all the time, price going down for weeks or months and it doesn’t endanger my trading unless the selloff is a sudden drop, big jump, or panic selling (or buying). Then that derails the trading and longer term and deep in the money rolling may be needed.

EARNINGS!!!

 
BMY

Options Income
(Click to enlarge)

BMY was a trade I wouldn’t normally take. A few traders in our Facebook Group were involved in this trade and when the stock tumbled from 56.50 a share all the way down to 46.90 many were unsure how to manage the trade and get out.

Then the questions pop out. Should you let the options assign and buy the stock? Or should you close the trade and take a loss? Or is there any other way to fix this trade?

I offered a help and take this trade to show how I would manage it if it was my trade.

So, I sold a 56.50 strike put of BMY when it was trading at 49.53 a share. Now it was my trade!

Since I opened the trade on January 23rd I started rolling the puts down using strangles and inverted strangles. I could roll our 56.50 puts down to 55.00 strike so far. Unfortunately, many traders in the group got assigned to the stock. I wasn’t though, and continued rolling this trade out and down.

it will take time before we will be able to get out of this trade. And you may also think that I was completely crazy to take someone else’s losing trade just to show off my trading ability and undertake potentially huge losses. But I like the challenge!

 
GOOGL

Options Income
(Click to enlarge)

GOOGL was an earnings play trade. I opened an Iron Condor (well, correctly it was a Short Iron Butterfly trade) with the following strikes:

+880 call
-855 call
-855 put
+830 put

and we collected $2,020 credit for this trade. We opened the trade on Thursday, January 26, before market closed. The next day, on Friday, January 27 we closed the trade for a total profit of $930 dollars (a nice 37% profit overnight).

 
ETE

Options Income
(Click to enlarge)

Originally, I opened this trade with ETE stock as a triple play – dividend capture trade. It became a hard to manage trade. During the life of this trade I realized how difficult it was to manage this underlying symbol with options. I like ETE, but as options trading instrument it is untradeable.

So I decided to not manage the options into assignment and rather I would purchase the stock out right to capture the dividend and immediately after sell ITM covered call to get out of the stock.


 

 

Are you Ready to Trade?

If you like results of our trading open yourself an account with OptionsHouse.com and start trading with a low commission rates + free virtual trading tool!

Your new trading account will come with a paper money account and will be immediately funded with $5,000 of virtual money for you to test the options trading and if you join our trading group on Facebook you can get a guidance, ideas, and trading education. Before you commit your real hard-earned money you can use the virtual account to test our strategies, learn, and ask all questions you need to learn options trading.

Once you learn and get ready, start trading live account and earn monthly income similar to ours. And we will be happy to assist you with that.

Seize the opportunity. Open a new OptionsHouse Account Today! Open and fund an OptionsHouse account to receive up to $1,000 worth of commissions on online trades for 60 days.
 

 

 

 · Options Trading Income & Equity Goals

 


For 2017 we plan to create the following average monthly income from trading:
 

2016 plan: $1,000 monthly income – COMPLETED in July 2016
2016 plan: $2,000 monthly income – COMPLETED in October 2016
2017 plan: $4,000 monthly income – IN PROGRESS ($2,468.87)
 

Note, these are monthly averages based on 12 month results. The individual monthly results month to month may differ.
 


For 2017 we plan to increase our portfolio equity:

 
at the end of 2017 plan: $130,000 equity – IN PROGRESS ($54,102.16)
 

When we reach the desired equity level we will apply for a portfolio margin in our trading account. This would allow us to increase our trading (and leverage) and trade more trades and more often. That would allow me to increase income and start trading for a living as a full time trader. With portfolio margin we would be able to trade up to 5 times more than with a standard RegT margin.

I do not have yet experience with portfolio margin account, but my expectations are that with approx. $150,000 equity we will be able to trade up to $600,000 account. With average 9.60% monthly income we should be able to make about $57,600 average monthly income. And that would be a great result from options trading. Income like this would definitely help us to meet our other, investing and investing unrelated goals and dreams.

Overall, I am happy with our trading results in January. The only concern I have is that our net-liq and buying power is low dues to trades such as WYNN. We need cash flow and WYNN is literally preventing it. So ultimately, our next month(s) goal will be to release the cash as quickly as possible so we can continue trading in lieu of sitting on a dead cash.

 
What do you think about options trading?




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Posted by Martin July 01, 2016
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June 2016 trading, investing, and dividends results


June trading exceeded my expectations in generating income. It didn’t seem like I would make as much money as I did. Also Brexit shook with my account in a scary way, but it remained just that – a scary hysteria. The markets recovered all losses in two days.

I learned a good lesson though. In the past I tried to predict and analyze the movement of the market as well as stocks I am about to be trading. It showed to be a useless effort. Every trade, every day is unique and every outcome will be different. No one knows future and no one can predict it. Even if all patterns known to the entire world point to a certain outcome, it doesn’t guarantee that the trade will do exactly what the pattern says it should do.

Predicting future in trading is basically setting you up for a big disappointment.

That’s why I am learning not to predict anything but rather be prepared for everything. If I am ready for any outcome and any outcome makes me happy, then I am able to trade without fear and carelessly (not recklessly). If a stock goes against my trade, I am perfectly OK with that because that presents a new possibility for a profit.

In May 2016 I made $1,262.00 in collected option premiums which was a great result exceeding my monthly goal making $1,000 per month. This month I made even more and finished with $2,331.00 in options premiums!

Hopefully, I will be able to repeat this success next month too!

June dividend income was higher than in May, but still lower than all higher months. The dividend income was $81.68 vs. $57.75 last month.
 

Options Income = $2,331.00 (account value = $5,589.18 +120.07%)
Dividend Income = $81.68 (account value = $20,143.39 +33.05%)
 

If you wish to see details about each account, continue reading below.


 

 
You may be interested in:

 
Travel Hacking from Anchorage Alaska to London & Paris By MAGGIEBANKS with NORTHERN EXPENDITURE

 
Are You Trapped on the Yellow Brick Road? By Mortimer with Mortimer’s Moneymachines

 
How to buy a car and not get screwed. 5 tips from a former car salesmen By Ty with Get Rich Quick’ish

 
Who is The One Percent? (Prepare to be Surprised) By THE MONEY WIZARD with THE MONEY WIZARD

 
3 Ways to Make Money in the Markets By Ben Carlson with A Wealth of Common Sense

 

 

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Posted by Martin May 30, 2016
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May 2016 trading, investing, and dividends results


At first, May 2016 trading started slow and I had a very low expectation of it. Many of my trades got in the money and I had to roll them away in time. I thought I would not be able to repeat my income from the previous month. But then the trades turned all around and this month ended even better than the last one.

In April I made $938.00 in collected option premiums but this month I finished with $1,262.00 my goal on collecting min. $1,000 per month.

Now, I just need to be able to repeat this in the next month and the following ones.

May dividend income was lower as May seems to be a slow month. The dividend income was only $57.75 vs. $84.49 last month.

Options Income = $1,262.00 (account value = $2,910.54 +14.60%)
Dividend Income = $57.75 (account value = $19,398.29 +1.26%)

If you wish to see details about each account, continue reading below.


 

 
You may be interested in:

 
Where Do Dividends Come From? By Dennis with Dennis McCain Investing

 
Recent Buy: Valero Energy Corporation By Ferdis with DivGro

 
Smart Financial Investments For 2016 And Beyond By Keith with DivHut

 
Lanny’s May Dividend Income Summary By Lanny with Dividend Diplomats

 
The Importance of Revenue Growth In Selecting Winning Investments By JC with Dividend Growth Investor

 
The Power of Dividends By DL with Dividend Ladder
 

 

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Posted by Martin July 28, 2015
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Options trading strategy adjustment


Three years ago I started trading options. I started with covered calls first, later moved to selling naked puts. Was I successful? Yes and no.

I made money and I lost money. My trading was like a roller coaster.

Euphoria was replaced with deep disappointment and anger when I doubled my account in one season and lost it all in the next one.

I was looking for a strategy which would work and make money consistently. Even naked puts which I thought would be an easy trading couldn’t do it. And I was running out of money to trade naked puts.

So I turned to spreads.

I made money and I lost money. And my strategy still didn’t work. I started trading SPX options. I made a lot of money. And I lost it again. All my trades provided with good excitement but they all were dangerous and risky. Every expiration I felt a stomachache worrying where the market ends.

I knew what I wanted to trade, but still didn’t know how. It seems like this is something every beginning trader is going through.

After desperately searching for the new way of trading I decided to adjust my strategy to make it safer, increase my probability of success and make money consistently without stomachaches.

Here is how I will be trading options.

I trade options spreads against SPX

I decided to trade options spreads against SPX only. No stocks. I want to focus on the market, be in sync with it and not get distracted by stocks, announcements, earnings, or any other aspects which move the stock price and create distraction.

For that I will only trade bull put spreads, bear call spreads and Iron Condors against SPX. If needed, I may adopt other options structures as a way to save a trade, for example converting a spread into a butterfly, etc.

I trade SPX options spreads with 45 days to expiration (DTE)

Before I traded 4 days DTE spreads. I opened a trade on Tuesday which was supposed to expire the same week on Friday. With the market volatility as seen throughout 2015 many of my trades got wiped out. The probability of success was very low.

By trading 45 DTE spreads I could widen my strikes and increase my probability of success beyond my imagination.

I trade 45 DTE SPX options spreads in a ladder to simulate weekly trading

I loved trading weekly options, but they were risky and unpredictable. I was thinking how to trade 45 days options weekly. I decided to create a structure I call a ladder. A period of 45 days represents seven weeks.

To start a ladder I sold one trade per week. After seven weeks I achieved opening a new trade on Tuesday and have expiration that same week on Friday. Exactly the same as when I traded my 4 DTE options. The only difference now is that on the seventh week, I open a seventh trade but my first trade is the one which expires. In eight week I open a trade #8 and my trade #2 expires and so forth.

The first 45 day cycle when I started a ladder I had to wait 6 weeks to achieve weekly expiration.

Same illusion of weekly trading, but a lot higher probability.

I use standard deviation channel and linear regression channel to set up a trade

In my Think Or Swim (TOS) program I use 9 months SPX chart with two studies – a standard deviation channel and 50 day linear regression channel. They are set up to represent 1st standard deviation and 2nd standard deviation.

When placing my call spreads I want the short strike to be as close to the 2nd standard deviation as possible or above it. But when opening that spread I want to collect min 30 dollars premium.

When opening my put spreads I use delta 8 – 10 for my short strike to open the spreads.

This increased my probability of success to 92%

I trade SPX options spreads with 40 dollar wide strikes

I started opening new spreads with five dollar wide spreads. But my goal is to reach a 40 dollar wide spread before I start adding more contracts. I believe, wider spread is better than narrower.

Why is wider spread better?

First of all, it is safer and you actually risk less money if the trade goes against you. You receive more credit per contract and commissions are same as if you traded a narrow spread.

For example, if you open a five dollar spread, you receive 30 dollars premium and pay approx. $11 in commissions (depends on which broker you trade with). With a 15 dollar spread you get 80 dollars premium and also pay approx. $11 in commissions.

To get 80 dollars premium, you would have to open at least 3 contracts (assuming each can bring 30 dollars only) and with that, you will pay around 20 dollars in commissions.

The chance that the price of SPX slices thru both strikes is lesser with wider spread, so potential loss is smaller compared to a full loss of more contracts of a narrow spread. And here is the safety of the trade. If for example you trade a 2035/2040 put spread and 2000/2040 put spread, it is very likely for SPX to drop below 2035. And if that happens, this trade is in full loss, while the second trade is still only slightly in relatively good shape as you are losing only a small portion of the entire risk.

For this reason I will be widening my spreads as time goes on.

I open SPX options spreads on Tuesdays

I do not open trades on Mondays and Fridays. I have seen experienced traders avoiding these days. I do not know the details why, but I adopted that policy. John Carter for example doesn’t open trades on Fridays (maybe because they are expiration days). Other traders and schools do not open trades on Mondays. So do I.

However, as my account grows I plan on opening trades not only on Tuesdays, but Wednesdays and Thursdays too.

Defending my trades

This is the hard part. I didn’t like defending trades. If I had to defend trades or close them, it was always for a loss and I hate taking a loss. All my search for a strategy was to find one where I do not have to defend a trade.

Although, I believe I have a strategy where I do not have to defend a trade, if it however happens and a trade goes against me I need to have a plan what to do.

I will not roll the trades as I did before. If any of the spread gets touched, I will either open an opposite spread or in case I already have a Condor I will move the untouched spread down and create an Iron Clad trade. Then I let the entire trade expire as is. There will be a loss, but smaller than if I did nothing or rolled trades away in time.

Once I will have more contracts opened I will attempt reducing risk by closing half of the spread when the spread gets touched. But I will only do this 7 days to expiration. If there is more days left, I will do nothing as it is very unlikely for the market to drop so deep (or raise so high) without recovery or correction.

Follow my trades with my free newsletter

I will be publishing the trades in my free newsletter showing each trade as I will be putting it on in my trading platform. So you can watch, follow, or even trade those trades with me.

You will be able to see the open trades and number of contracts in “My Trades & Income” tab on my blog. I will also post these trades in “Calendar” where you will be able to check expiration of each trade and the entire process of creating and managing the options ladder.

Trading options vs dividend investing

Dividend investing is a great strategy, but now I look at it slightly differently. I no longer consider the dividend growth strategy my main investing or trading goal. I however look at it as my wealth preservation.

I have seen some traders investing their proceeds to other instruments or investments. Some invest the proceeds to gold or silver, some buy land, others real estate. I want to do the same. Or similar to be exact. I want to be buying dividend stocks.

I understand that at some point in my life I will no longer be able to actively trade options. Dividend stocks will be here to subsidize trading. My options trading is here to create an income now. Not 20 years from now. Now I want to trade, grow my account and enjoy income from trading. Once I will not be able to trade (maybe 20 or 25 years from now), I will have my dividend stocks to take over.

For this purpose I will trade this option strategy in my taxable TD account and in my ROTH IRA account.

Money distribution

To grow my accounts and enjoy my income I have the following distribution rules.

In my TD account:

For every $1,000 monthly income I withdraw $200 for my own use and spending (paying bills, debt, vacation, but also buying dividend stocks, or saving to my ROTH IRA account). After I reach $10,000 monthly income, I will take out 50% for my own use. The rest will be left for taxes and account growth.

In my ROTH IRA:

After I reach $2,000 monthly income I invest 50% of that income into dividend growth stocks. The rest will be used to grow my options trading portion of the account.

Dividend investing

In my ROTH IRA account once my options trading generates $2,000 or more per month I will invest 50% into dividend growth stocks. This means I will invest $1,000 or more monthly into dividend growth stocks.

To choose a stock I want to invest in I created a screener which selects the most undervalued stocks for me. All I have to do is to look at the stock’s rank and invest in it. I publish the results of the screener below. The lowest the rank the more the stock is undervalued.

 

If any of the stock changes from “Buy” into “Avoid” or increase the rank I stop investing into such stock but I keep it in the portfolio. I only sell if it stops paying dividends.

In my TD account I do not invest into stocks and I sold all positions when adopting this strategy. My TD account is now only for options trading.

I wish you good luck and a lot of money :)

 
 




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Posted by Martin September 12, 2014
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Mr. Market offers a good entry point into dividend stocks

Mr. Market offers a good entry point into dividend stocks

Today trading started promising in the morning, but afternoon turned sour. Once again we see panic and nervousness returning to the pit. Today, markets lost ground and sold off. Nothing dramatic yet, but we could see an easement.

What pushed stocks down? Among those companies which were dragging S&P 500 down were energy stocks (and as some media told us it was due to Russian sanctions) and surprisingly some dividend stocks were on the sale as well.

Not all dividend stocks were on sale today. If you however hold MLPs, and REITs you probably have noticed a sell off around or even exceeding 3% drop. Some stocks are even back to a point where it makes sense to watch them closely and potentially buy more shares.

Here are some of the stocks I believe are in a good level to consider buying:

Chevron (CVX)

An energy stock dragged down for several days was Chevron (CVX). It currently sits at its support level at $122 a share. It went down from its 5 year high at $135 at the end of July this year and sold off hard on heavy volume on Russian / Ukraine tension. We saw a little break throughout August and in September the selloff gained its strength. It is in its full swing and at the beginning of it trend wave.

(I believe the market moves in waves. Each wave has its own depth and length. CVX just started a new wave down and if you look at the chart below, it is already in a downtrend! What does it mean? It means that most likely the selloff will continue for some time.)

The CVX median number is $120 a share and I believe we will see the stock to get to that point. I believe it will be a perfect point to either buy new shares or add to existing position. The DCF (discount cash flow) calculated fair value is at $134.84 thus buying at $120 a share will provide enough margin of safety.

And just quick data I like to watch:

CVX pays $4.28 annual dividend
yield: 3.50%
Its projected 10YOC is 9.08%,
payout ratio 40%
5 yr average growth: 9.53%
paid dividend since: 1912
# of years of consecutive dividend increases: 19 years

 
Chevron
 

What others say about Chevron:
orporation: Is a Cash Flow Boom on the Way?
Chevron and ExxonMobil
Billionaire Ken Fisher’s Top Dividend Stocks
Chevron Corporation (CVX) Dividend Stock Analysis

 

 

PPL Corporation (PPL)

PPL is another energy stock (MLP) which is offering a good entry point. It’s not as good as Chevron, the stock would have to drop $30 a share (from today’s $32.64) to match Chevron’s path, but even at today’s level it is a fair entry point. As an energy stock the stock’s price action is the same as Chevron’s.

The first sell off started at the beginning of July this year and with a small break in August we saw a renewed sell off in September. Last two years PPL had declining revenues due to acquisitions, but it increased dividends this year in February so I believe, it still is a good buy if the stock goes lower to $30 a share. The calculated fair value is at $37 a share so there will be good margin of safety at this price.

If I was buying the stock, I would trace it down and I would use my contingency order strategy to buy the stock only at reversal. The stock is also starting a new down wave in the middle of a sell off, so I am expecting further price decline.

PPL pays $1.49 annual dividend
yield: 4.50%
Its projected 10YOC is 5.43%,
payout ratio 113% (note, this is MLP, the ratio will be at or higher than 100%)
5 yr average growth: 1.63%
paid dividend since: 1946
# of years of consecutive dividend increases: 14 years

 
PPL
 

What others say about PPL:
9 High-Yielding Utilities With A Growing Dividends
Top-Yielding Dividend Stocks to Combat Low Interest Rates
Compilation of all Dividend Stocks Per Sector for 2014
4 High-yield, Safety Stocks for Retirees
What Should PPL Corp. Shareholders Do With A 65% Stake In Talen Energy?

 

 

Realty Income (O)

Realty Income (O) a monthly dividend company which pays dividends every month and tend to increase it every quarter increased dividends yesterday by 0.13%. It is nothing much, but I like monthly dividends which can be reinvested.

Today the stock was under fire. The reason for REITs being under sell off today was most likely renewed fears that FED would increase interest rates sooner than what the investors anticipated.

As some on the market consider this the end of the world, it offers a great opportunity to buy more shares. The stock has been range bound in $40 – $45 since June 2013 with a few exceptions at the end of 2013 year when the stock fell below $40 and touched $38 a share.

Some people say the stock is still expensive and it will be expensive even at $40 a share, but I believe this stock will always be expensive. The reason is that this is a reliable company in the REIT industry which prides itself being a monthly dividend company for all seniors who rely on their regular monthly income. As our population is aging, more and more people will want to buy this stock which will be pushing its price higher although the valuation doesn’t justify it.

So you have two options – you can wait for the proper price, or you can take TA (technical analysis) help to find the best possible entry. If you have waited for the good price entry, you have been probably waiting for more than 5 years already and the price still didn’t get closer to you to entry. And most likely it will never get back down to you.

I believe that any price around $40 a share (+/- dollar) is a good entry. If get below $40 a share – even better, take it as a cherry on top of the cake.

Today the stock sold off by 3% and again, we are at the beginning of a down wave, so the selloff may continue next week. If I was buying today (or next week) I would use contingency order to track the stock on its way down and buy at reversal.

Calculating fair value is tricky for this stock. My own DCF calculation reveals a fair value to be at $11.95 a share, Morningstar estimates the value at $44 a share. You choose which one you want to use.

O pays $2.20 annual dividend
yield: 5.10%
Its projected 10YOC is 15.15%,
payout ratio 235% (note, this is a REIT, the ratio will be at or higher than 100%)
5 yr average growth: 5.33%
paid dividend since: 1994
# of years of consecutive dividend increases: 16 years

 
O
 

What others say about Realty Income:
Realty Income: This REIT Should Be Part Of Every Dividend Investor’s Portfolio
Realty Income Not Cheap, But Still Good
Realty Income Corp (O) Dividend Stock Analysis
Realty Income (O) Dividend Increase

 

 

American Capital Agency (AGNC)

AGNC is a company involved in mortgage back securities and unlike Realty Income, it is sensitive to interest rates. Generally investors do not understand the difference and when they assumed that FED may increase interest rates they start selling everything what has “realty” in its description. So although Realty Income is not exposed to interest rates, it still will be sold off.

AGNC is however exposed to interest rates, mainly to fast changes of the rates between long term and short term papers. AGNC makes money on a wide spread between those two. If the spread is open wide and changing slowly over time, AGNC can easily adjust its portfolio to those changes. Fast moves can however kill it.

We have seen this in the past when the stock crashed from 30+ levels to current 20-ish levels within two months.

Although we have heard talks about interest rates since July 2013 and AGNC is well aware of the future implications and adjusted its portfolio, investors yet continue panicking any time they hear about changes in the rates. Today’s slide in price is yet another example of ignorance. For educated dividend investors this slide is yet another great opportunity to buy more shares of one of the high quality mREIT stocks.

A high quality mREIT doesn’t mean safe however. If you plan on buying this stock, you will be rewarded with a nice dividend payout, but be aware that this stock is one of the riskier dividend stocks. I own shares of this stock, I have owned it for years and believe this stock will perform well. I was buying when the stock was selling at 30, 31 and even 33 a share and yet dividends and a few purchases at $20 a share lowered my cost basis down to 24 a share. My overall loss on capital is only -5%. When the stock recovers back to its 30s (and it is slowly rising) I will be positive, enjoying dividends on the road.

The company had to cut dividends several times. The last cut happened in December 2013. Since then the dividend rate holds and the company is poised for increasing it once again. Time will show.

If you are okay on adding a bit aggressive and risky stock to pepper up your portfolio, AGNC can be a good candidate.

AGNC pays $2.75 annual dividend
yield: 11.80%
Its projected 10YOC is 11.80%,
payout ratio 129% (note, this is a REIT, the ratio will be at or higher than 100%)
5 yr average growth: -6.88%
paid dividend since: 2008
# of years of consecutive dividend increases: 0 years

 
AGNC
 

What others say about AGNC:
American Capital Agency Corp – When The Dividend Yield is Bigger Than My Understanding of the Company
American Capital Agency: Let’s Face Facts
I Recently Increased My American Capital Position, Should It Be In Your Portfolio?

 

 

Prospect Capital Corporation (PSEC)

PSEC is a BDC (Business Development Company) which makes money investing into other businesses. This stock is considered by other investors as one of the best in this industry. It is not a true dividend growth company but it pays hefty dividend monthly. I use this stock as an income generating machine where the received dividends are used to buy other dividend growth stocks.

I do not expect any growth, but it paid its dividend consistently since 2004 and it even increased it for two consecutive years.

If played correctly you can make money and collect nice dividends. The stock has been range bound for years between $9.5 – $11.50 range. Whenever the stock approaches the lower level I usually add more shares to this stock. We have been there in June this year when the stock sold off, today we are slowly approaching to these levels once again. I consider everything around $10 a share (+/- 0.5 c) a good entry point.

My calculated fair value is at $15.93 a share, thus buying at the current levels can be a good opportunity.

PSEC pays $1.33 annual dividend
yield: 12.90%
Its projected 10YOC is 19.47%,
payout ratio 171% (note, this is a BDC, the ratio will be at or higher than 100%)
5 yr average growth: -3.43%
paid dividend since: 2004
# of years of consecutive dividend increases: 2 years

 
PSEC
 

What others say about PSEC:
Prospect Capital: Insiders Are Taking Advantage Of The Buying Opportunity In This 13% Yielder
This Is One Slick Dividend Stock
High Yield Dividend Stocks It’s Always a Good Pick When The Market is Bullish
Prospect Capital Corporation Redux
A Brief Primer on Business Development Companies (BDC) Part 1: What are BDCs and why should you invest in them?

 

 

Vanguard Natural Resources (VNR)

VNR is another MLP involved in oil and natural gas extraction. Although it is in Basic Materials sector, due to exposure oil and gas prices and recent Russia tension it is affected by sanctions and therefore the stock experienced the same sell off as energy stocks. It is yet another stock similar to PSEC above – my money making machine which helps me buying more quality stocks than VNR. It is not a true dividend growth stock though. It doesn’t increase dividends much. Dividend increases in the past are offset by dividend cuts. What to expect from this stock then? Nice dividend.

Once again, if played well you can make money and collect dividends. The median price for this stock is $28 a share. Today the stock fell to that level. Adding at the current price or waiting for $28 a share or bellow could be a good strategy to add this stock if you want a hefty dividend which can be reused for buying other high quality stocks. It depends on your strategy.

This stock is already at the end of a downward wave, so I do not expect this stock to continue falling further. It may continue sideway, maybe slightly drifting down or slightly drifting up.

VNR pays $2.52 annual dividend
yield: 8.70%
Its projected 10YOC is 8.70%,
payout ratio N/A
5 yr average growth: 4.77%
paid dividend since: 2008
# of years of consecutive dividend increases: 0 years

 
VNR
 

What others say about VNR:
Upstream E&P MLPs I’m buying
Vanguard Natural Resources: Is The Recent Weakness A Buying Opportunity?
9 Dividend Stocks Providing An Inflation Hedge With Increased Dividends
Vanguard Natural Resources Is On Track To Grow

 

 

Goldcorp Inc (GG)

Goldcorp is a mining company involved in precious metals, mainly gold. It moves in waves and it can be an interesting capital gain play stock with a decent dividend. It is not a true dividend growth stock, but it does well so far and can be a good addition to the dividend portfolio if you want exposure to mining companies. It experienced its up & downs on the way during the last 5 year history of this stock and thus you have to play it that way. To make money, you want to be buying at the bottom of those waves. Although I am not advocating bottom fishing here, when you look at the chart you could see nice waves with lows at $22 a share in December 2013, $24.50 a share in April 2014, $22.50 in June 2014 and today we are approaching to those levels once again.

The stock is in the middle of its downward wave, so I am expecting further decline. The best play to buy into this stock would be using the contingency order by tracking the stock on its way down and buy a reversal. If you enter in, you will be receiving a decent dividend while riding the new wave up to 30-ish levels. There you may sell or stay in (hold) and wait for the next down-wave to add more shares.

Morningstar estimates its fair value at $27 a share, so if they are right, you will have some margin of safety at these levels.

VNR pays $0.60 annual dividend
yield: 2.40%
Its projected 10YOC is 4.01%,
payout ratio 31%
5 yr average growth: 30.18%
paid dividend since: 2001
# of years of consecutive dividend increases: 4 years

 
GG
 

What others say about Goldcorp:
Goldcorp: This Gold Miner Hasn’t Run Out Of Steam Yet
Profit from Global Growth with the Natural Resources Sector
Best Dividend Paying Stocks – Recap January 2014
Investments That Pay Monthly Dividends

 

 

These were a few stocks from MLP, REIT, and BDC industries which were recently beaten down and which caught my attention as good candidates to enter a new position or add more shares. Except Chevron & Goldcorp I own them all in my portfolios (either TD or ROTH) and next week I may take advantage of this decline to add either of them to my portfolio. I am not decided yet which one would be the best stock to add, if opening a new position in Chevron or Goldcorp or just add more shares to the existing companies. I will make my decision on Monday next week.

What about you? Are you planning on taking advantage of the decline in these stocks?

 
 




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Posted by Martin June 11, 2014
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Stocks retreat taking some break as I expected

Stocks retreat taking some break as I expected

Stocks retreated today. I didn’t have time to check why actually it was happening, but honestly, I do not care.

I look at the market trend and stocks trends from technical analysis perspective and trying to eliminate the noise media are creating every day.

What I see is an insignificant pullback on 1 year chart with a very strong uptrend move and inflow of money. The intraday chart was flat the whole day.

The market broke from a consolidation pattern in May 23 and since then strongly moving up. When looking at my indicators, we will most likely see a little more of an uptrend as the growth is not slowing down.

It may change of course. I am not an expert and do not have a crystal ball, but we may see some growth still.

This movement however made me to open a new trade against TEVA (bull put spread), which was a violation of my rules, money management, and increasing free cash reserves. Heck, I realized that I must keep my trading platform closed during the day as the temptation opening a new trade as soon as I have free cash in my account is very strong.

 




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Posted by Martin April 01, 2014
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March 2014 review


Up LadderMarkets regained the upward trend momentum as it confirmed its trend continuation last Friday. What does that mean? It is simple, the trend will continue and it will make sense to be buying any dips should they occur.

In this post I would like to review my view of the market in the past and my April 2014 outlook, but most importantly to review the results of my investing and trading.

In the previous post from February I revised my goals and the way I invest my money. I still will focus on dividend investing, but not in all of my accounts as I did before. I am shaping my strategy and tweaking it to make me comfortable and satisfy my way of investing.

I still use dividend growth strategy as my main strategy in my ROTH IRA account and Motif Investing account. In my TD account, however, I shifted my focus on options trading as a main strategy and dividend investing as a supportive strategy. That means, that I will invest a percentage of proceeds from options trading into dividend stocks and use the rest reinvesting into options contracts. Read my revised strategy in my previous post
“February 2014 progress, goal changes, and TD portfolio vs. S&P500“.

March 2014 market review

If you take a look at the latest market chart (SPY below) you will see a nice consolidation. What is it I see in the chart? I look at a few indicators:
 

  • Bollinger Bands
  • 10 day MA vs. 20 day MA
  • Chaikin Money Flow

 

Let’s start with the Bollinger Bands. This indicator will not tell you, which direction the market will go, but it will tell you what momentum the market is experiencing. The bands work like a rubber band. They contract and expand. Look at the chart. When you see them contracted, you may expect a dramatic move and a strong expansion of the bands. It will not tell you which direction the trend will go. It will just tell you that it will happen sooner or later.

When I see 10 day MA crossing above (or below) 20 day MA, then it is a moment when the trend reversal or breakthrough is going to occur. But, in order to avoid a false signal, the 20 day MA must be also trending up (for upward trend, or down for downward trend). If you check the chart below, you will see, that 20 day MA trend was moving up when it was crossed by 10 day MA.

Chaikin Money Flow indicates money flow into or from the stock. Although the flow is still negative, you can see a reversal in it as well. We may expect more money flowing into market which would support the trend.

SPY

Janet Yellen backing off

As many were expecting, myself included, FED’s (empty) chair (woman) is already backing off from her boasted proclamations about the stimulus and she announced that the interest rates will stay low longer than she originally claimed. To me, this is a confirmation of what Peter Schiff was saying all the long, that Yellen has no clue of what is happening and that she is just a Bernanke 2.0. She has no exit strategy, just pretends.

So, the new “trend” in FED’s policy boosted stocks more up and it looks like we have a clear path for new highs.

Earnings expectation

I do not have much to say about this item. All I could find is that Alcoa (AA), which is always the first to start reporting was recently also breaking thru upwards in expectation of great earnings season. It will be fun to see if it comes true. Alcoa has been downgraded many times last year by analysts, so if it beats their expectation this time, we may expect that this would boost the entire market.

April 2014 outlook

Historically April is considered as a good month for markets. Out of 19 years, Dow was up for 15 years. My indicators I watch are turning positive, so, I expect April to be a good month and our accounts should collect more gains. During last month I was increasing my cash reserves up to 30% (although not all in all of my accounts as this was a lot slower process this time than I expected). In some of my accounts I increased my cash reserves to 20%, but for April 2014 I will slightly use them down to 10 – 15% only as I do not see a need to keep reserves higher.

Remember that besides dividend growth investing I also actively trade naked options. In order to be able to manage the risk, I like to keep cash reserves which would allow me to roll contracts up and down as needed to avoid assignment.

March 2014 results

Although March 2014 was choppy and fear index I like to watch dropped down to 34 points I made money.

I had nice dividend and options premium income during this past month. Here are some numbers (TD account only):

 

January 2014 premiums: $156.10 (1.55%)
February 2014 premiums: $139.26 (1.38%)
March 2014 premiums: $746.62 (7.41%)
   
January 2014 dividends: $25.87 (0.26%)
February 2014 dividends: $167.02 (1.66%)
March 2014 dividends: $68.77 (0.68%)
   
Total 2014 income: $1,303.64 (12.94%)
2014 unrealized premiums: $926.00 (9.19%)
   
Account balance: $12,418.73 (23.30%)

As you can see from the table above March 2014 was a great month to me. What about you? How was your March 2014 and the entire year so far? Post a link to your website or write down your results to encourage other investors!

Have a great April in the markets!
 
 




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Posted by Martin October 21, 2013
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How to sell put options – new trade – Safeway (SWY)

How to sell put options - new trade - Safeway (SWY)

Why do I sell put options and covered calls when I am a dividend growth investor? The answer is simple. I want income.

When I was looking for a strategy about a year ago after I nearly destroyed my account, I asked myself a question: “what do you want from your investment? What your account should accomplish?”

Of course, there are a plenty of answers, such as enough money for retirement, growth, hit the home run, income, value, etc.

I wanted income. Some people say that you want income when you are already retired, before you should strive for growth. And if possible aggressive growth.

But recessions, corrections and high volatility in the past convinced me that once I receive the income, it is mine. No one can take it from you. You can spend it, lose it, or reinvest it. I wanted income which I can add to my contributions and reinvest even more money.

Income source #1 – dividends

What stocks can bring you income? Cash on hand which you can withdraw anytime you want? Of course it is dividend paying stocks which can do that for you. So I decided to start buying high quality stocks, which pay dividends, have sustainable dividend growth and great dividend history.

But when I received my first dividend it was only 12 or 20 dollars per quarter. My small account couldn’t generate more cash. What can you do then?

Income source #2 – options

My next choice was trading options. Previously I had a great experience with options so I knew what options could do for any investor, not just me. But from my previous trading I also knew that it would not be any advanced option trading I wanted. I still didn’t want the “prediction” part in trading advanced options.

So what trading would be the best? Simple basic options strategies such as naked puts or covered calls.

Why selling options? When you sell options, you receive cash on hand right away. Nobody can take it away from you. These type of options are called credit trades, because you receive cash – credit.

This credit is an additional income I can put on top of my dividends, spend it, lose it, or reinvest it. And no one can take it away.

Since March 2013 I made $1919.74 in options trading of additional income. That equals to 38.39% gain or 108.31% annualized profit. I could take that money and reinvest.

Do you remember what my goal is? My goal is to pay off the debt first. So I suspended any cash contributions to my account. All growth and new investments are made only from profits made in dividends and selling options.

How you can sell put options? Here are some important steps.

Step #1 – sell put options only against stocks you are OK to buy

When I was learning how to sell puts, I had problem with this rule. I didn’t want to be assigned to the stock ownership because I didn’t want the stock.

It was crucial for me to realize that I have to sell options only against stocks I would normally buy. Stocks I want to own. If the trade goes against you, the worst case scenario will actually be your best one – you will buy 100 shares of a stock you like and you want. This gives you a great peace of mind!

Example: I like many stocks I want to own, but I chose Safeway as the stock for my put selling. I will be selling puts as long as I can or have enough money. And if the worst happen I will be forced to buy 100 shares of this stock. Will that be a tragedy? Of course not!

Step #2 – select safe strike price

To chose the correct strike price for your option you would need to be in tune with the stock, have knowledge of technical analysis and partially a fundamental analysis too.

Let’s take a look at the example. I looked at SWY chart to see where the potential support for the stock price could be.

Safeway

At the chart I can see two potential supports, one at $32 a share and the second at $30 a share. To select the proper support will be determined by the time of your option and the credit you can receive. So let’s take a look at the option chain to see what options are available around these levels.

Step #3 – select your expiration time

Open an options chain in your brokerage account to see what strikes and what prices are available:

Options chain

I want monthly income from my trades as I do not want to be waiting 5 months for expiration. If I select monthly income and will be able to collect 0.40 (or $40) dollars monthly, in 5 months I can collect $200 dollars. If you take a look at March 22 2014 put option I will only be able to collect 1.70 (or $170) for the same period and I am taking larger risk hoping the stock will remain above $31 strike in 5 months.

So I decided to check the November 16, 2013 options chain.

Then take a look at the Puts table and since we will be selling puts our corresponding column is called Bid.

When I was selling this put option the stock was above #33 a share. Today, when writing this report the stock is below $33 a share. Thus $33 strike is already In-the-money.

Do you remember what supports I was looking at? It was either $30 a share or $32 a share. Yesterday the 32 strike was out-of the-money while today it is at-the-money. Since the 30 strike offers only $10 for the contract, this trade doesn’t make sense. The 31 strike offers $25 per contract which can be considerable, but 32 strike offers 50 dollars per contract (yesterday when I was opening the trade it was 40 dollars.

I chose to open November 16, 2013 32 strike put.

Step #4 – have your plan in place before opening the trade

This is a very important step! The previous steps were just technicalities, but this step is the heart of your trade. Without it you end up blind and paralyzed to act when the trade turns against you.

Before you open a trade you must ask and answer the question – what everything can happen with my trade and what I can do to fix it?

So what are the outcomes of this trade? There are only three possible outcomes, but several possible steps to take to react properly.

  1. The stock will end above the 32 strike at expiration – November 16, 2013
  2. The stock will end below the 32 strike at expiration – November 16, 2013
  3. You will get an early exercise

The stock ends up above 32 at expiration

This is the best outcome in this trade. If that happens the option expires worthless. It will be removed from your account, your maintenance deposit will be released, you keep your credit and you can repeat the trade.

The stock ends below 32 at expiration

If this happens you have the following options:

  1. Roll the trade further in time and lower strike
  2. Close it and take the loss
  3. Let the option be exercised and buy 100 shares at $32 a share

I would opt for rolling the option farther in time and lower strike. For example, if the stock falls down to $30 a share I will buy my option back and sell January or March 2014 30 strike put option. This transaction will most likely be a wash. That means that I will use the credit received to buy back the in the money option. So this trade will cost me nothing.

If however rolling the option in time and strike won’t help, I may decide to take a loss and close the contract by buying it back. But that is not an option for me as I would do whatever it takes to fix the trade and get out either break even or with a small gain.

The third option is to get exercised. And here comes my advice #1 from above – sell puts only against stocks you are OK to own. If this happens you will be forced to purchase 100 shares of Safeway at 32 dollars a share no matter where the stock price is.

But this isn’t as bad as it looks. From the strike of 32 dollars you have to subtract the premium we received before. In my trade example it was 0.40 per contract. Thus my cost basis will actually be $31.60 (break even) per share and not $32.

Since I already collected several premiums from my previously sold put contracts, my cost basis would actually be as follows:

– $2.20 premium collected in March
– $0.35 premium collected in September
– $0.40 premium collected in October
+ $32.00 strike – stock purchase price
——————————————
= 29.05 break even – actual cost basis

As you can see, if I get exercised, I will be purchasing at $32 a share, but my actual cost basis will be $29.05 a share. Will the stock drop that deep? Of course it may happen, but if no turbulence, panic or company disaster shows up, the stock shouldn’t experience such a deep drop and even if I get exercised I will own the stock still relatively cheap.

Any questions?

Hope this step by step process on selling a put option against a stock and collect additional income was helpful. If you still have questions or need help do not hesitate to ask. I will gladly help you with your own trade.

 

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