Stock Futures Flat; Time to Sell Short Duration Puts?
Earnings season "surprise risks" can be mitigated by selling puts on SPY, DIA, IWM
By Donald E. L. Johnson
Speculator
Dow Jones 30 Industrials (DIA) and S&P 500 (SPY) futures are looking a bit bullish for Tuesday while NASDAQ (QQQ) futures are a bit bearish. CNBC.Com.
That has me thinking I need to be a bit risk averse in trading covered calls and selling cash secured puts this week.
While both of these trades are meant to generate income, selling covered calls is a bit bearish and a tiny hedge against a market or stock dip, selling cash secured puts (CSP) is a bullish trade. This is because when you sell a put contract for 100 shares, you make a contract to buy the stock or ETF at the strike price if the price of the equity is below the strike when the options contract expires.
I try to limit the number of stocks and ETFs on which I sell covered calls and CSPs. But I also believe every trade should be a small one to limit risks. And I like to have more than a dozen equities in my options portfolio to diversify risks. I often do 40 to 50 or more options trades a month. On a stock like CAT, I may do four or five weekly trades puts and/or calls trades a month.
To find stocks, I look for companies recommended as good stock picks by services like Valuentum.com.
Valuentum has rating system (VBI under 3 or 4 is a sell, over 7 is a buy). It also publish its fair value estimate (FVE).
Here is a note I wrote myself last night about some puts sales I might do this week:
1.19.22. Sell short duration puts on EBAY, FAST, FDX (VBI=8. FVE $295 $236-$354). FFIV fve=$204. $163-$245. VBI = 7. GD FVE=$173 $138-$208. VBI=7. KLAC fve=$390. $312-$468. VBI=7. LRCX Lam Research. fve=$633. $506-$760. VBI =7. MU fve=$79. $55-$103. VBI 7. NOC fve=$329 ($255-$403.). VBI= 7. T fve $35. $28-$42. VBI =7. VZ fve=$64. $51-$77. VBI= 7. VZ has huge debt.
We are in earnings season, so I may limit my risks by selling puts on index ETFs like SPY, DIA, IWM. The returns will be lower than they are on individual stocks, but the risks also will be lower.
For me, short duration can be one (three days this week) or two weeks. Expirations are on Fridays for most of my stocks. Some durations are monthly. This month’s monthlies expire this week on Friday, January 21.
Most books on options trading advise trading 45-day or longer puts contracts, but with the market correcting, I want more visibility about what a stock will do, so I’m doing short durations now.
Because the markets are dipping and many stocks are correcting, I’m selling 3-day and 10-day durationputs at strikes 8% to 20% below their current prices. If I can get good premium prices at those strikes, I’ll check longer durations or just move on to another possible trade.
Disclosure: I own or have options positions on CAT, FDX, T and VZ.
Beware: I am not a certified stock analyst nor a financial advisor. I’m an independent speculator. I don’t take responsibility for how or when others trade.
I closed about 25 CSP positions and a few covered calls and other options positions this morning, most at smaller than planned profits. As a result, I've unloaded a lot of risk and set myself up for trying again when the markets settle down a bit. The Omicron situation is not getting much better in the U.S. and looks like it will get worse abroad, making supply chain problems tough to solve. Wall Street is talking about a half point hike in interest rates to start fighting inflation. That would be a good move, but the market doesn't like it. Labor shortages persist, and a lot of us vulnerable seniors are socially isolating like it was 2020. Biden and Democrats are campaigning to lose next November, and the GOP is fighting just as hard to help Democrats win. They're saying and doing crazy things, and it's all about them, not America.
Correction: I'm an independent speculator.