Market Conditions 9-29-14

Today’s market was crazy and I hope everyone has survived with some dignity left.  I have been revamping my strategy over the past couple weeks and haven’t been posting as much.  I fortunately got out of my Ford trade last week to initiate my new trading strategy.  As providence would have it, I got out just in time. 

I started to advocate selling covered calls for safe extra income but after I started learning how to sell cash secured puts and credit spreads, I no longer feel that covered calls are the best option trade.  The problem with covered calls and especially in a market that has become volatile, is that your money is tied up in a security that may lose value while you wait for the expiration of the option.  If you sell a cash secured put you keep your money safe in your account while you wait for expiration.

What happened to Ford today was a confirmation of that fact.  I had initially planned to hold Ford until the October 18^th expiration of one of my covered calls.  After learning about selling cash secured puts I liquidated my Ford position and started selling a few out of the money puts on some volatile bio tech stocks.  If I get assigned the shares at the end of expiration I will have bought the stock at an extreme low which is not a bad situation because the stock will most likely rebound.  If I am able to wait till expiration then I will keep the entire premium.

This is my new strategy now and I will provide more details as my trade develops.  In the meantime it is important in this market with its new found volatility, to keep as much cash as possible and to enter options trades without owning the underlying stock.  Credit spreads are probably the best plays in this market.

REITS Are Taking Heat

I quit while I was ahead.  I got out of CYS as well.  The REIT sector is taking a hit and even though the dividend yield is enticing I don’t know how they will sustain it going forward.  If it starts to make a recovery I will re-examine it, but for now I will stick to my covered call strategy to reap the “dividends” I’m looking for.

Here’s another article about the drop in the REIT market:

Why REITS Are Falling And Will They Recover?

Selling Covered Calls For Extra Income

As the saying goes, “When you know better, you do better.”  I have changed up my strategy after watching what was going on with ARR.  I was a champion for this stock for months because I felt that it was eventually going to go back up to its $7-$9 price range.  Well you can’t wish something to happen, there has to be concrete steps and data to follow it up.  ARR never improved its financials and consequently the value of the stock stayed stagnant even when comparable stocks were rising. 

After a conversation with a friend of mine I realized that a safer and possibly more lucrative strategy would be better.  If you buy a well-known blue chip stock with sound financials that has enough volume, you can sell covered calls each month for steady income, much like the dividends I was seeking with ARR.  My own personal requirement was to find a stock that was trading below $20 so I could load up on it to have enough to buy at least 200 shares.  As you know (if you have traded options before) you have to have at least 100 shares to buy or sell 1 options contract.  To make the minimal return that I want to make I need to sell at least 2 options contracts.  The stock I chose was Ford (F).

Here is some more information on covered calls.  Many of the people and sites I’ve come across go into a lot of detail about covered calls but just know it’s not as complex as a lot of people make it seem.

Investopedia – Covered Calls

Trade King – Covered Calls

Alan Ellman - The Blue Collar Investor

Monthly Income From Covered Calls

If you look at the Bid price, that’s what you will be selling your call at.  Just remember that the Ask price is what you will be buying your call back at if you choose to buy it back (you will do this if you want to keep holding your shares and don’t want to be assigned at expiration).  To make any money you want the Ask price to keep getting lower so you can buy the options back for a price cheaper than you sold them for (buy low, sell high).  Either way if you sell a call at a strike price higher than the price you bought the stock (out of the money), then you have already made your money so you can just sit back and wait for expiration (always factor in fees and commissions).

Always buy the next month’s option because you want enough movement to occur in the time value of the stock.  Some people trade the weekly options.  I haven’t tried that yet but I may.

If you are new to covered calls, after you watch some of the videos and read some of the information on the links I posted, all of what I just said will make more sense and hopefully will simplify what you have learned.

Let me know how your trading goes by leaving a comment and if you have any other ideas I would love to hear them.