OPTION WHEEL IN ACTION – 23% Potential Return on SWN Shares
STRATEGY: Sell cash secured put, get shares, create covered call, REPEAT…OPTION WHEEL
NEW ALERT Adjustment: SELL Southwestern Energy January $12.00 Covered Calls @$0.30 for each 100 long shares to lower cost basis to $9.75.
SWN shares were originally assigned at $10.45 from the November option sale to buy stock at 8% off discount to where stock was trading when option was sold. (SEE ALERT BELOW).
A December $12 covered call was sold for $0.40 to lower cost basis to $10.05. That call expired worthless Friday to collect that premium.
Today with SWN at $10.75 a January $12 Call sold for 30 cents lowers basis to $9.75.
View Original October 24th Trade Below.
New Trade Alert for (SWN)
Southwestern Energy CASH SECURED PUT SALE
Sell November SWN $11.00 Put @$0.55 or more to open
Risk Rating: 3.0 (1 = lowest 5 = highest)
Above Break Even Probability: 70%
Let expire or get long shares at $10.45
HIGH PROBABILITY 5% potential return in less than four weeks
BUY Southwestern Energy 8% Lower, or Get Paid Not To…
Volatility is OPPORTUNITY…
The crucial measure of payoff for an investment is RETURN on RISK.
Controlling and quantifying risk is the primary job of an investor. Once the worst case scenario is determined downside exposure to ANY possible event is calculated in dollar terms and financial impact on the portfolio only then can participation be weighed
Risk and Probability are the factors that can be controlled using options as the most positive attributes. The super leverage benefit is secondary to the ability to know the maximum cost of any potential catastrophic stock move.
Southwestern energy had dropped from near $30 to $5 in December. The stock slam has seen a $25 more than 80% decline in just eight months.
SWN trade has tracked from $5 to $15 since that extreme low bottom. A profit taking pullback has support at the $10 midpoint pivot.
The option volatility at the 60% level makes the option expensive in relative value compared to the market itself. Option selling strategies take advantage of the increased premiums.
The potential return on risk is 5% is attractive with a $10.45 break even at the option expiration.
Buying at near the midpoint support and an 8% discount price if assigned is a way to position for a long term recovery in a near single digit stock…. Or to get paid not to buy it at these extreme low levels.
The high implied volatility makes option selling strategies attractive as pure probability trades that utilize time decay acceleration. The February options have six weeks until expiration.
One tactic to buy at a lower price, or get paid not to, is used by money managers to buy stocks they WANT for long term portfolio positioning. Use others fears for your benefit by selling a CASH SECURED PUT to enter the stock at a major discount.
Option tactics can be employed to make money in Up, Down and Sideways action to take advantage of other variables or time and volatility.
The fear and uncertainty can be used to get in another 25% lower for those who are at worst are comfortable holding on to an inexpensive stock to wait for a potential recovery.
The straightforward Price Order to buy a stock at a lower level is common if it can be determined where it is comfortable to get in below current prices. Put in the trade at “X” and wait for the dip to enter.
Professional money managers have certain points at which they would buy a desirable stock but an option strategy lets them get in at discount or get paid not to.
Selling a CASH SECURED put, has the same mathematical risk profile as a covered call, would assign the stock long at the option strike price. The true entry basis is actually even lower with the subtraction of the premium.
With the Put sale there is an OBLIGATION to buy at the strike price if it is assigned.
However, if the stock is not below the strike at expiration the premium received is all profit. Get in the stock at a discount or get paid not to…
As of this writing SWN is trading around $11.30.
There are two rules that Cash Secured Puts traders need to follow to be successful.
Rule One: ONLY SELL PUTS ON STOCK YOU WANT TO OWN.
Have the funds in the account to buy the stock at a discount if a selloff continues.
The worst case scenario is to be assigned the stock shares, each option represents 100 shares, as a long-term investment. Paying in full ensures that no additional money is needed to hold for potentially many, many months or even years until price recovery.
Rule Two: Sell either of the front two option expiration months to take advantage of time decay.
Collect premium every month on put sales until assigned shares at a cost reduced basis. Every month that you keep the premium is money subtracted from the entry price.
Trade Setup: Sell the SWN November $11.00 Puts at $0.55 or better to open. The cash secured Put sale would assign long shares at $10.45 if it is put to you costing $1045 per option sold.
ONLY sell this put if you want to own the shares at a discount to the current price.
The combination of time decay and 70% probability of SWN finishing above the $10.45 break even make the option sale attractive with 26 days until expiration.
Lean on the $10.00 midpoint as a support level.
If assigned shares, a December covered call can be sold against the stock to lower the cost basis again when you own it.
If SWN stock does move lower, buy the shares for 8% cheaper than the current share price. Otherwise, you get paid not to… and get a 5% return on risk in less than a month.