August Covered And Naked Puts Options Trades On Paycom And Other Stocks Update #1
Small and large investors in dividend stocks can use covered calls and puts trades to generate monthly income from options premiums and options trading
By Donald E. L. Johnson
Cautious Editor
Paycom Software’s sharp price drop last week is the focus of this update.
PAYC is a growth stock recommended by Goldman Sachs and a lot of analysts.
Its earnings report disappointed the market and caused the sharp sell off in the stock.
I discuss my PAYC trade and what I may do about it.
Paycom Software Inc.’s (PAYC) 20% drop in reaction to disappoint earnings results and guidance last week turned what looked like a good cash secured puts income trade on July 28 into a sure loser.
The question is how can I recover from the PAYC crash? By Friday’s close at $290.42, PAYC is down 6.41% year to date. On Barchart.com, it is rated an 8%, or weak, sell.
Wall Street analysts are holding to their high target prices for PAYC. See the links below.
In the comments section of my post on my August puts trades I discussed my thoughts about PAYC (I’ve done a little editing.):
On July 3, Goldman Sachs made a big deal about its "Rule of 10" stocks, which it says will be the big grower for several more years.
PAYC was on the list. Last week I sold PAYC August $330 strike puts. Today it closed at about $299.
This hasn't been a good week.
The big fail for me in the Q2 earnings report was the 87% drop in free cash flow, the valuation metric that I and a lot of others use in valuing stocks.
I think the 3-day rule is order. I'm waiting three days to see how analysts and the stock respond the the Q2 results and guidance.
Often when stocks plunge after an earnings report, the drop lasts longer than a few days.
People who still have profits on the stock may take profits or hold on for the longer term. Those who hold many sell covered calls on PAYC.
If investors sell covered calls, they'll get high options prices because the stock's implied volatility is high.
High options prices suggest high risk.
So PAYC is now a high risk stock, and it's no longer an 88% buy on Barchart.com. It is a hold.There is an 18% chance that PAYC will close below $250 on Nov. 17, 2023, according to the PAYC put options market.
There is a 17% chance that PAYC will close above $360 on Nov. 17, 2023, according to the PAYC call options market.
So if my PAYC 8.18.2023 $330 strike puts are exercised, I can sell PAYC 11.17.2023 $320 calls for about $12.80 and make money on the trade if my puts and calls trades are exercised.
The risk is that PAYC will fall to $270 or lower.
Do I take my $3,760 loss now or try to make $2,800 on the trade?
Then I looked at how Wall Street was reacting to the PAYC guidance and the sharp price drop and posted these comments:
Piper Sanders' target price is $399, BMO Capital $356, Credit Suisse $395, Barclays $350.
I tried to buy the puts back for $39.50. No luck. After reviewing analysts' target prices, I cancelled the order.
Morningstar.com lowers its fair value estimate for PAYC to $370 from $388.
Analysts’ Opinions Are Mixed on These Technology Stocks: Paycom (PAYC), Pinterest (PINS) and Alight (ALIT).
Analysts' top technology picks on 8.2.2023: AMD, PAYC.
Given the analysts’ views and the weak sell rating at Barchart.com, I’m inclined to hold on to the PAYC 8.18.23 $330 strike puts until they expire. After they are assigned, I’ll either sell the stock and take my losses or sell covered calls at an out of the money strike that is unlikely to be called in September.
For a trader who put a big percentage of her risk capital into this one trade, this will be or was a hard loss to take.
For traders who have a diversified stock and options portfolios, the loss is likely to be more than covered by profits made in other trades, which is where I am. For me, the trade is disappointing and a potential income tax loss.
Every trader has to manage risks at the same time we make trades that we think will be profitable.
I sold PAYC 8.18.23 expiration $330 strike puts for $2.30 per share. I traded only one contract for 100 shares, which limited my risks. The delta was 0.12, which indicated that there was only a 12% probability that the puts options would be exercised. Now there is a 100% probability that 100 shares of PAYC will sold to me unless I buy the puts back at a loss before the options expire.
Sometimes the deltas and probabilities are wrong because new information changes investors’ minds about a stock.
On Barchart.com, PAYC was an encouraging 88% buy, and the bullish trend was strengthening when I sold the puts. This shows that ratings based on historical performance are interesting, but they don’t promise or predict higher or lower prices.
I sold the puts shortly before PAYC reported its latest earnings. Selling the puts just before the earnings report made the trade more risky, and, potentially more profitable. This time, the trade was too risky.
It will take awhile to either take my losses or to begin working my way out of this hole by trading covered calls on PAYC until I’ve collected enough covered calls options premiums and dividends to cover the losses. A nice rally would help cut the losses.
Paycom is a strong company that is expected to continue growing relatively quickly as indicated by the Goldman Sachs bullish call on the stock and by the average analysts’ rating of 4.24 out of 5, which makes it a “moderate buy”. The analysts’ high target price is $450 a share, the mean target is $382.62 and the low target is $302, according to Barchart.com. Analysts usually are too optimistic.
Between my portfolio updates, I report my thoughts and trades in the comments section of this and other posts.
I respond to comments on the comments section where readers’ comments are posted. That is, if you have a question about this article or other comments, I'll discuss your questions with you in the comments section below this article.
LINKs:
Home Page. See my more than 100 articles on options trading, stocks and watch lists. If you read several of these articles, you’ll learn how my strategies are meant to work. No guarantees. Links to useful web sites are on the lower right corner of the home page. Scroll down.
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8.11.23. XOM $111.64. Sold XOM 8.25.23 (14 days) $107 puts for $1.10. ARoR about 25%. Delta -.30, OTM 68%, IV 23.7%. M* 3*, FVE $118. Analysts high target price $145, Mean $125.94, Low $107. Average analyst rating 3.78, moderate buy. Barchart 8%, or weak, buy rating. My XOM 8.18.23 $111 calls may be called next week before it goes ex dividend on 8.15.23.
8.11.23. I bought back my IWM 8.11.23 $189 puts for $.07 just in case the markets tank on the close.
My QQQ 8.11.23 $368 puts are in the money. I think I'll take the QQQ shares and write covered calls on them Monday. The goal, over time, is to sell ATM and later OTM calls at strikes that will let me break even or make a profit on the trade.
I'm waiting until Monday to see how the dip is going before doing anything else.