Bull Put Spread and Cash Secured Put Strategy

Sorry I’ve been a little absent but I wanted to refine my new option strategy before I shared it. I made a couple of trades that went south on me and I didn’t want to share a strategy that didn’t work.

After some losses and then some wins after doing some tweaking I feel that this strategy is something that will have a high success rate.

As I started my strategy I originally only wanted to trade ETF’s because of their improbability of going under.  However I feel that you can successfully trade this strategy on reputable stocks that are trading at a discount.  

Here’s the strategy in a nutshell:

• Decide what you are willing to risk and then divide that by 100 for the 100 shares you may have to buy for on options contract. 
• That will give you the price of the underlying stock you are going to scan for.  So for instance if I am only willing to risk $4,000 then I need to look for stocks that trade around $40 a share.
• I only look for reputable companies or ETF’s and that’s about the lowest price range you will find.  A good range to trade at is around $60-$100 a share.
• For this cash-secured put strategy you need to have the money to buy 100 shares of the stock just in case you get assigned.  Our goal is to not get assigned but in case you need to save a trade that went bad you have another option of selling a call to make back some money.
• Make sure the stock is on an uptrend – the trend is your friend.
• Check the weekly options chain and look for a Bid price on the Put side of at least .60 (it can be .50)
• There should be less than a .30 difference between the Bid and Ask price.
• The strike price should be at least 2 strikes out of the money.
• Check probabilities to make sure that the probability of the option being in the money is less than 30% and the probability of it touching that price is less than 50%
• You want to execute your trade between Monday and Thursday before the next week’s option expiration to get the most premium and to take advantage of the accelerated time decay.
• Sell the put close to .60 and buy the closest put that costs .05 or less.  This is for insurance in case the trade moves against you but you don’t want to pay too much for insurance.  It makes this a bull put spread.
• Set your alerts on your trading software to notify you of 10% moves of the stock either way.  This way you can go about your day and not have to watch the stock until the end of the day. 
• If the stock starts moving against you, get out of the trade and find another stock.  But don't be too scared if the stock moves down to a technical line of support, let the trade play out especially if it's in an up trend.
• If the stock price moves in your favor be patient and wait for the next week Wednesday or Thursday before expiration and then close your positions to get as much profit as possible.

I’m Changing My Tune On ARR and Singing CYS

Alright I have finally been convinced…a friend of mine has talked some sense into me about ARR. I have been championing this stock for a while now because of its fantastic monthly dividend.  Well things have changed and the performance of the stock over the past year has been lackluster compared to other comparable stocks.  I also own CYS and it has completely outperformed ARR over the past year.  I did some more research and the company is sound.  It only invests in real estate that is backed by government lenders like Fannie Mae and Freddie Mac and the company is run by a former investment strategist.  Having a company run by someone who understands things from an investor perspective makes me feel more secure because it makes him more cognizant of market considerations.

Also the website of the company is a bit more professional and there is more information about the company and its strategy than there is on ARR’s website. 

The downside with CYS is the fact that they pay quarterly and the dividend yield is 2 percent less than ARR.  Even still you are making around the same amount of money.

Overall I think CYS is a better investment because of its consistent equity growth versus ARR’s poor equity performance over the past year.  Even if ARR rebounds CYS will already be ahead. 

In Defense of ARR

A recent article in Motley Fool questioned whether ARR is a good investment.

“Though ARMOUR Residential presently exhibits a dividend yield of nearly 14%, investors should be carefully watching ARMOUR Residential's book value in the coming quarters. This should yield a clue as to whether further dividend cuts are looming down the road."

There are two points I would make about this article: first ARR has declared their dividend through the end of 2014 so the dividend won't change either way until then, second the real estate market is at its lowest point so the price is not going to get any lower.

Some would say that ARR went down 43% last year but I would contend that that's the time to buy.  “Buy low, sell high” is the basic law of investing.  If you buy high then you won't make any money.

Here's the thing about ARR:  it's a numbers game.  In my humble opinion it's the best stock out there to make the most monthly income off dividend payments.  Because of its low price and consistent high yield you can buy more of it and make more each month.  Most dividend stocks cost too much to buy in bulk and make a decent monthly income.  I did a lot of research to find this stock and that's the reason why I've been in it so long.

If you were to put $100,000 in ARR since the dividend is declared till the end of the year, you would make $7000 by the end of the year just off dividends. That's 7 percent for 6 months not including the possible equity gain. If there is an equity loss it most likely won't be any larger than 7 percent.

For the general investor I would agree that a more conservative strategy is better.  It also depends on how old you are and how long you have to invest.  Investing in ARR is definitely an aggressive strategy and if you are risk averse, it would be prudent to balance things out with other stocks and maybe some ETFs.

Indeed, not one of us knows what's going to happen tomorrow.  If an investor says they do they're lying. We're all just making the best educated guesses we can.

We all have our strategies so you got to trust your gut. I could come up with a ton of articles to support buying ARR and just as many not to support buying ARR.  At the end of the day you got to call a play and hope your team wins.

Tesla: Where To Go From Here

Here is some commentary on TSLA from CNBC:

CNBC Commentary on TSLA

The analysts say that TSLA is overpriced or at the level where it will now be consolidating and moving sideways.  They believe that there is no more equity left at least for the time being.  I am contemplating whether to sell at these levels and put my money into my dividend stocks or just hold and wait to see where it goes from here.  If TSLA paid a dividend I’d be more than happy to stick around, it’s just that I don’t want to tie my money up when I could be making money instead of letting it sit on a stock going sideways.

I’ll see what happens this week and then make my decision by the end of the week.

TSLA Is Getting Hammered Today

The Bears are hammering TSLA today.  I sold my position for a loss because I knew it was going lower.  I’m going to try and scale back in when and if it hits $190.  There was a negative feeling about the missed earnings and with BMW releasing news about its new EV car to compete with TSLA.

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I got back in today at $202  because it found support off a resistance level.  Now the market has reversed possibly off of Janet Yellen's comments. This is a perfect representation of the chaos of the market. You never know what will happen.  TSLA had an earnings announcement that wasn't favorable and with possible competition the stock tanked today.  That coincided with the Fed Chair Yellen speaking today to conspire to make it a very schizophrenic day.

My New Volatility Strategy

So for the next few months I am going to focus on a volatility index, specifically VIXY which is an ETF that is supposed to follow the VIX.  If you look at the yearly chart it is moving like the VIX but it is also going down.  

Since its creation several years ago, VIXY has plummeted to around 27 points when it originally opened around 400 points.  There is definitely upside potential to this ETF and since I bought it in the middle of the day I am already up a few 10ths of a point.  

My observation is most every time the market goes up the VIX goes down and most every time the market goes down the VIX is up.  I am buying at a very low point now so as the market goes down I will wait till I make my profit target then sell.

This is a contrarian play and is basically a hedge against the market.  I am strictly playing the stock this way to make short term money.  I want to see how well I can time my entries and exits for the most profit.  Wish me luck and join me if you would like.  Let me know your results in the comment section below.

Dividend Strategy Reinforced

One of my strategies that I have been adamant about over the years is buying high yield dividend stocks to help build cash in your portfolio.  I just looked at my two biggest earners and calculated the amount of dividends earned since I bought the stock and I can’t stress the point enough.  Even if the stock may be down in value the value of owning the stock will beat the fluctuation in price. 

Take CYS for example, it pays quarterly dividends but it has a high yield.  Even though my deficit is -$12.85 after owning it only 7 months I made $64 in dividends giving me a net profit of $51.15.

My biggest earner ARR has paid me $320.72 since owning it back in June of 2012 and I am up $127.34 in equity.

This just goes to show that even with the ups and downs of the market you still can make money off of a stock that pays consistent high yield dividends.

Is ARR Still A Good Buy?

There was a recent article about some analysts on The Street downgrading ARR to a sell.  A member of one of forums I'm in asked me about my thoughts on this development.  Here's the article:

Article on The Street

My response to this is that it's a sign of that market sector as a whole, all REITS took a beating last year. ARR was the one on top. This is the time to stock up (pun intended)...buy when everyone else is selling, sell when everyone else is buying. As the article said itself "the consensus estimate suggests that this trend should reverse in the coming year... This year, the market expects an improvement in earnings ($0.60 versus -$0.53)"