Market Curiosity: Exploring Markets And Systems

May 1, 2010

Profit from value stocks by shorting options (updated June 2011)

Filed under: Editorials — Jeff Fitzmyers @ 3:05 pm

Edges: compounding value through dividends, selling options on stocks that have a realitively low risk of bankruptcy, and working with time rather than racing against it.

TIMBER  Timber: An Excellent Retirement Vehicle 10% of portfolio.
PCHPCL, WY“You Need to Consider This Crisis-Proof Investment”
By Chris Mayer, editor, Capital & Crisis & “The #1 Investment of the Iron Chancellor” by Tom Dyson
The Ultimate Agriculture Investment by Steve Sjuggerud.

SOME VALUE STOCKS
BUD“Over the past four recessions, the company outperformed the S&P 500 by about 39%.”
DBA – EFT of grains. Can only go so low. Hedge Farm! The Doomsday Food Price Scenario Turning Hedgies into Survivalists
DBV – Can’t find it right now, but Mr. Sjuggerud had an article that strongly suggested that going long the 3 currencies with the highest interest rates while shorting those with the lowest was a consistently profitable strategy. Unfortunately DBV does not include the USD, but it is maybe good enough.
ECA – Canadian energy company with a lot of land, and a lot of natural gas.
JNJ“… sell essential consumer products that people have to buy in recessions…”
IEP – Mr. Icahn owns 92% of the stock. Sell puts when below book value.
INTC“…88% of its revenues from outside North America.”
MCD“…doubles its dividend every four years.”
O“Since 1994, the monthly dividend has increased 58 times… and grown 91.5%.”
PG – 65% of its sales outside the U.S.
PHO – EFT of multinational companies involved in water (and other) infrastructure. Plan for China’s Water Crisis Spurs Concern
SLB – largest oil services company.
TSO – Oil refiner, can only go so low.
XOM – Considered to be a very well run company.
WMT – Very well run, everywhere.
(Note, I am using Stansberry info to illustrate these examples since they have already done the work. I don’t get any money from them. I don’t like their advertising methods, but I do find much of their info valuable.)

IBD STOCKS
The IBD Big Cap 20 and tentativley adding the IBD 85-85 Index The point is to use stocks that tend not to go bankrupt instantly.

WHAT TO DO WITH VALUE STOCKS?
Sell options. I am not an expert on this and don’t use fancy option software. But potentially, the worst time to buy a call is about 4 weeks to expiration, so that’s when I like to sell them 🙂 

Basic option entry: Only sell options on stocks you are happy to own. Sell at the money puts when the short term RSI (or any indicator) dips and the stock is either trending up or going sideways. Lots of local examples.

A) If option expires worthless, look for another entry.
B) If puts are going to be in-the-money either do nothing and let the stock be “put” to your account and start selling calls that are 1-2 strikes out of the money when the near term RSI dips. Or buy back the option and sell another one at the same strike price a month or two out.

Exit the stock: These stocks do go down, they just rarely go bankrupt so fast you can’t get out. Some hold stock no matter what and just keep selling calls (when RSI makes a short term peak) to generate income and then use the income to sell more puts. Or just sell stock when it breaks a major monthly up-trend line. (Trader Vic II: Principles of Professional Speculation shows how to make a proper trend line.)

Examples of selling options.
How to Buy Silver at a 10%-20% Discount. Please don’t buy SLV — it might not have silver backing it. Consider SLW instead.
+ How we trade our own money
+ How to Become a Stock Market Landlord

BASIC RULES FOR SHORTING PUTS
+ Sell out of the money (usually) puts when price seems to be at a local low.
+ Strike price is best under one strong support level.
+ Sell 1-2 months out.
+ If the stock stops “acting right” get out. Avoid the 5% that can cost money.

Options Writing Mistakes To Avoid
– Mistake one: Over-positioning
– Mistake two: Selling too close to the money
– Mistake three: No exit plan

Back to How I trade

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