July Naked And Covered Puts Trades On Dividend Stocks Update #1

Small and large dividend stock investors can use covered calls and puts trades to generate monthly income from options premiums and options trading.

By Donald E. L. Johnson

Cautious Speculator

• It is risky to do bullish trades like selling naked and covered puts in weakening markets.

• Last week I sold covered puts on two stocks that I own and I sold three naked puts on stocks and ETFs I don’t own.

• Income trading is about meeting monthly income goals from dividends and options premiums in good markets and bad.

With the markets dropping last week, I did five bullish sales of cash secured puts.

Click on images and zoom in for better views

Two of the puts sales were on securities I own and three were on securities that I don’t own and don’t really want to buy at the strike prices I chose. I own Newmont Mining Corp. (NEM) and Southern Co. (SO). I don’t own Dow Industrials SPDR (DIA), US Home Construction Ishares ETF (ITB) or Microsoft Corp. (MSFT). I sold puts on another stock I own Devon Energy Corp. (DVN) on June 23.

I sold all of these puts to generate options premium income, and I sold them at strikes that are unlikely to be assigned. Deltas under 0.20 indicate a low probability that a put or call option will be assigned. And out of the money (OTM) probabilities over 75% also indicate that put and call options will not be assigned. Both deltas and OTM probabilities are used to manage the risks of assignment when assignment is not wanted by a trader. Markets don’t always live up to probabilities.

If the puts are assigned, I’ll have to decide whether to hold the stocks and ETFs and sell covered calls on them for options premium income. Or I could sell them at profits or losses. I never know what the market will do while I have open options positions, but I usually sell puts on shares that I want to buy at lower prices.

In this market, I don’t know whether I’ll want to buy at the strikes I’m using on these trades. Those decisions will be made between now and when the options expire on July 28.

MSFT is a 100% buy on Barchart.com. DIA and ITB are 88% buys and SO is a 40% buy. SO’s buy ratings appear to be strengthening. The other buy ratings are weakening. DVN is a 88% sell and NEM is a 100% sell. DVN’s sell rating is weakening while NEM’s sell rating is strengthening.

This table shows how these equities have performed year to date and over the last 12 months. I’m assuming that active options traders like to work with this kind of data.

For traders of puts and calls, this means that they need to keep a close eye on their trades. At some point, they may have to decide to take losses on the options and stock trades, or, in the case of puts, they’ll have to decide whether to take assignments when the options expire.

LINKs:

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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 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.