Aggressive Dividend Stock And Income Traders Sell Covered Calls On Equities They Own
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
The bear markets are making stock picking and trading covered calls and puts for income more difficult and riskier.
In this kind of markets, selling covered calls on stocks you own is less risky than buying stocks and writing calls on them.
Selling way out of the money cash secured puts is another way to nibble at stocks and ETFs and generate some premium income.
I’m bearish and mostly selling covered calls, but I’ve also sold some puts as discussed below.
Stock picking is a lot harder in a bear market, and bear markets make it harder to find good dividend stocks for trading covered calls and selling cash secured puts. That’s why I haven’t been posting much since early April. I don’t like to discuss trading strategies that I’m not doing myself. And you can only say “Sell covered calls on stocks you own” so many times, which is what I’ve been doing as reported below.
Please click on the image and zoom in. I last wrote about these ETFs on May 10.
But it’s time to look for trading opportunities because more aggressive risk takers are looking for ideas and strategies.
We’ve been in bear markets since about November. Barron’s says the bottom for the Dow Jones Industrials may be around 30,000, down from Friday’s 31,261 close. Nobody can predict what the markets will do.
Futures are indicating that Friday’s late surge may continue Monday. But whether that snap back will continue all day Monday or Tuesday remains to be seen.
Given that the Fed is determined to stop inflation in its tracks with more hikes in the federal funds interest rate and that those hikes can’t be baked into the market, it looks like the bears will be in control for some time. We have seen this movie several times.
One way to find ideas is to check in with a couple of guys who have been blogging on stock picking and options trading since about 2004.
The Covered Calls, Cash Secured Puts, and More blog posts its new options trades on the leading exchange traded funds shown in the above charts every Thursday and Friday. Traders might want to do those trades, which this week involve selling cash secured puts.
Also watch the Covered Calls Advisor blog, which posts new trades as they’re filled.
If a trader wants to sell cash secured puts instead of buying a stock or EFT and writing covered calls, he could use the StockCharts.com point and figure charts shown above to find puts strikes that are less likely to be exercised.
On Friday, the DIA ETF that tracks the DJIA30 index broke down into new bearish territory before it closed above the day’s lows. The chart indicates that the bearish price objective is 293 for DIA, or about 29,300 for the Dow. That is about 6% below Friday’s close. Stocks and ETFs often run past their PnF chart price objectives. Cautious traders might want to sell the 280 strike puts that expire in two to four weeks.
I sold some three-week Deere (DE) June 17 $300 strike puts on Friday when the stock was about $315 because I’m a long-term bull on the stock and want to own it at a discount. The $300 strike puts gave me a nice RoR.
But most of my income trades have been covered calls on stocks I own and don’t want to sell now. I sold the covered calls at .5 to .16 deltas. On stocks and ETFs I don’t want to sell, I traded the calls three to four days before expiration. On equities I want to sell, I traded the calls that expire June 17.
What can happen is that the stock will snap back before expiration and be called. That happened on my AT&T (T) covered $19 strike covered calls. The calls were exercised and I sold the stock at a loss in an IRA. That is fine because I want to put the money into better opportunities when the time is right.
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.
Ways to use StockRover.com to analyze stocks
Calls vs Puts Options: What’s the Difference?
Wars Breed Inflation, Rising Interest Rates, Market Turmoil
A video on how to place options trades on Think or Swim.
Beware
Like 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 DE, IWM and DIA. 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.