Watch For Opportunities To Sell Puts On the Dip or Correction
Apple and Microsoft took hits Thursday as growing speculation that the Fed will hike interest rates a half a point next month sank most stocks.
By Donald E. L. Johnson
Cautious Speculator
In anticipation of higher interest rates that are expected to slow the economy and hurt stock markets, AAPL and MSFT dipped Thursday.
It may be early to sell puts on stocks because lower stock prices will provide higher premiums on puts optons.
Puts trades to watch on AAPL and MSFT are discussed.
AAPL and MSFT took moderately big hits Thursday along with the major indexes after the report that inflation has reached 7.5% sent the markets tumbling. Traders sold stocks in anticipation of as much as a half point hike in interest rates sooner than later.
Clearly, some traders just came to that conclusion Thursday after the inflation numbers were released. The report obviously wasn’t ‘baked in” to stock prices before the report came out.
Let’s assume that it will take awhile for the markets and these stocks to adjust to the reality that the Fed is likely to move against inflation by raising interest rates quicker, more frequently and higher until the new monetary policies cool economic growth and inflation.
Dividend and options premium income traders looking for lower risk cash secured puts trades must decide when to take advantage of the lower stock prices and sell 30-day to 45-day or even longer duration puts on strong stocks like AAPL and MSFT. I last wrote about selling AAPL puts on Feb. 8.
These examples are meant to be adjusted to current stock and options prices at the times traders decide to execute their trading plans. Until the correction bottoms out, the goal is to sell puts at very low deltas after the selloff has pretty much run its course.
AAPL puts
AAPL closed Thursday at $172.12, down $4.16 a share. It’s 52-week high was $182.94, and its 52-week low was $116.21. AAPL’s support levels are between its $149.52 200-day moving average and its $171.52 50-DMA, or say, $164.
Apple’s options markets are more active, liquid and deep than most, if not all, grains and other commodity futures markets. That makes getting fills on all kinds of trades relatively easy.
On Thursday, 921 AAPL 2.25.22 expiration $120 strike (delta zero) puts were traded at $0.04 a share. That shows that quite a few options traders think they may be able to buy Apple for $120 a share, or 30% below Thursday’s close. This assumes that more than one trader sold those options for $3,684 in premiums and put up $11,052,000 in margins to do the trade.
Some traders will sell AAPL 2.18.22 (7 days) $160 (delta -.09) puts for about $0.43, or an annualized return on risk of about 9.7%.
Others might sell AAPL 3.18.22 (35 days) $140 (delta -.05) puts for about $0.46, or an annualized RoR of about 2.67%. The delta indicates that there is a 5% probability that the stock will close below the $140 strike and be assigned and sold to the seller of the put for $140 a share. That the puts can be assigned makes selling puts a bullish trade as well as an income trade.
In markets like this, if you have the cash, it is better to sell more contracts further out of the money (OTM) to reach your premium income targets than to sell higher strike ad higher delta puts options than you would in a bull market. It is up to each trader to decide, of course.
MSFT puts
MSFT closed Thursday at $302.38, down $8.83. It’s 52-week high was $349.67 and its low was $224.26. MSFT’s 50-DMA is about $310.90. So instead of being a support price it is more of an upside resistance price. The 200-DMA support is $295.12 and the parabolic sar indicator support price is $291.34. The next lowest support is at about $271.
On Thursday, 315 MSFT 2.25.22 $230 (delta -.06) puts were sold for $0.06. Selling puts is a bullish trade. If MSFT closed below $230, they would be assigned and buy the stock at about a 23% discount from Thursday’s close. Traders who don’t want to take puts assignments can buy the puts back before they expire.
The most actively traded (1,533 puts options, 100 shares per option) MSFT March puts option traded Thursday was the MSFT 3.18.22 $270 (delta -15). The last trade on that put was $2.49 per share for an annualize RoR of about 8.33%.
Again, every trader has to decide whether they want to own these stocks and at what prices they should sell puts or whether they should sell puts or just buy the stocks at a price that makes sense. It is best to sell puts only on stocks you want own at the strike price the trade is done.
Question: Will you hold or buy AAPL or MSFT? Do you buy, sell or sell their puts and calls?
LINKs:
Home Page. See previous articles on other stocks and options strategies.
Calls vs Puts Options: What’s the Difference?
Beware
Like all investing, trading stocks and options is risky. If you can’t sleep with market risks, you might want to let someone else do your trading. Consider an option trading ETF like XYLD, which I own. I also trade its calls and puts. 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 am short MSFT puts.
@realDonJohnson. I’m active on twitter where I tweet about trading and other things and link to tweets about stocks that I like.