A Bear Market Strategy for Selling Puts on IBM, MSFT and Other Blue Chips With Active Options

Pick good undervalued dividend stocks with active and liquid stock options that can be used to generate weekly and monthly income by selling covered calls and puts options.

By Donald E. L. Johnson

Cautious Speculator

• Selling cash secured puts (CSPs) in a bear market is risky.

• The risk of having puts assigned can be managed and reduced by selling CSPs deeply out of the market with big margins of safety (MOS).

• IBM is a candidate for selling cash secured puts because its options are active and deep as well as liquid. The stock has bullish price objective.

I spent the weekend planning cash secured puts trades on IBM and other stocks I would like to have in my dividend stocks portfolios. But I'll spend most of today selling calls on the stocks I own during the bear market rally.

IBM is a good candidate for selling CSPs because while its technicals are mixed, its point and figure chart at Stockcharts.com has a bullish price objective of $181. This chart reflects the opinions of everyone who trades IBM, not the opinions of individual analysts or writers like me.

This chart shows a bullish momentum indicator, the Stock Charts Technical Rating (SCTR) of 87.5 out of a possible 99. It also shows a bullish Chaikin Money Flow. But the RSI, parabolic sar trend and trend since late last month look bearish, which is why a lot of traders aren’t ready to buy the stock, yet. The 52-week was $114.56. Support looks like it is around $118.

I'm looking at selling CSPs as a bear market strategy that I can use while I wait for the market to bottom. That means that I want deep and liquid options with a fair amount of activity so that I can get my orders filled at mid points between bid and ask prices. It's not always easy, and often you have to adjust your ask prices a few times as prices move.

If a trader sells IBM 8.19.22 (32 days) $110 strike (21% MOS or discount, delta -.04) puts for about $0.38, the return on risk (RoR) will be about 0.27%, or 3.1% annualized.

In addition to IBM, I'm looking at new CSP positions on MSFT, CAT, DOW, CVX, CSCO, XLE, KMI, GIS, DVN, ABBV, GILD, CG, CPB and USB. I don’t own IBM or MSFT, but I own the rest of these stocks and would like to own more of their shares.

My bear market strategy is to sell CSPs at strikes that are at least 10% to 20% discounts from the current equity prices. If I can do that on a one or two-week trade, great. More likely, I'm looking at Aug. 19 or September expiration trades to get the margin of safety (MOS) and premiums I want.

In this market, I'll take lower yields and bigger MOS over high yields and the greater risk of having puts assigned at strike prices that may not look so good if prices drop another 5% to 20% after I buy the stocks.

During last year's bull market, I sold CSPs for annualized returns on risk (ARoR) of 15% to 30%. In this bear market, I'll take 3% to 10% ARoR because I'm not ready to take new positions in any stocks. That is, I don't want to have puts assigned right now.

What I'm trying to do is generate premium income while the markets are sinking. After a trade expires profitably with a worthless put options, I'll roll it forward with another CSP trade on the same stock with the strike and MOS adjusted to reflect what I think are current market conditions.

The goal is to make a certain amount of premiums. Instead of selling puts with a lower MOS and higher premium, a trader can sell more contracts at the lower strike to get the desired income on the trade. Of course, this takes more cash to secure the trade.

At some point, prices will bottom and rally. Then I'll sell at the market (ATM) CSPs with the intention of generating some good income and buying the stocks at small discounts from whatever their prices are.

After I buy the stocks, I may let them run higher awhile before selling covered calls to generate income, or I'll sell 5% to 10% out of the money (OTM) calls that have a small risk of being called.

For me, these are income trades first and bottom fishing a distant last. It's all about managing risks, not about picking the bottom, which is close to impossible.

My longer term goal is to build my portfolios of blue chip dividend stocks that have liquid options for covered calls trades.

LINKs:

Home Page. See previous articles on other stocks and watch lists. If you read several of these articles, you’ll learn how this strategy is meant to work. No guarantees. Links to useful web sites are on the lower right corner of the home page. Scroll down.

IBM: 3 ways to play earnings, by Matthew Smith.

Ways to use StockRover.com to analyze stocks

Calls vs Puts Options: What’s the Difference?

How to trade the wheel.

Wars Breed Inflation, Rising Interest Rates, Market Turmoil

A video on how to place options trades on Think or Swim.

BewareLike all investing, trading stocks and options is risky. I’m an active private speculator who trades covered calls and sells puts on stocks for my accounts. I am not a professional analyst nor a financial advisor. I don't take and won't take responsibility for how other people trade. This article is for educational purposes only. It is not advice. The data presented looked accurate at publication time except for intra-day fluctuations, but I can’t guarantee the accuracy. Traders should do their due diligence. I own and/or have options positions on IWM, DIA and other equities. I reserve the right to trade any of the listed stocks and options at any time. I receive no compensation for producing this content nor for any links.@realDonJohnson. Because I don’t want to litter subscribers’ in boxes with emails, I write only one or two newsletters a day. I’m active most days on twitter where I tweet about stocks, options trades and other topics.