Options for stock investors. A better way to trade.

New Trade Alert March 22nd – Cliff Natural Resources

Steel Sale…New Trade Alert for (CLF)

Cliffs Natural Resources CASH SECURED PUT SALE

Sell April CLF $8.00 Put @$0.40 or more to open


Risk Rating: 2.5     (1 = lowest   5 = highest)

Above Break Even Probability: 70%

Let expire  for 5% return on risk or get long CLF at $7.60.


HIGH PROBABILITY 5% potential return in a month  

BUYCLF 10% Lower, or Get Paid Not To…


Volatility is OPPORTUNITY…


The crucial measure of payoff for an investment is RETURN on RISK. 


Risk and Probability are the factors that can be controlled using options as the most positive attributes. 


Resource stocks have surged in the last year as beaten commodities made a comeback.  The rebound in metal and mining stocks has paused after a straight up move.



Cliffs Natural is up an astounding 175%+ in the last year even after the pullback from the February top.  The $4 to $12 rally run has midpoint support near here at the $8.00 level to lean on. 






The option volatility at the 60% level makes the CLF options 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% in a month is attractive with a $7.60 breakeven at the option expiration.  


Buying at an 10% discount price if assigned is a way to position for a long term recovery in a single digit stock…. Or to get paid not to buy it at these extreme low levels.


Put the one month high probability percentage return in perspective. 

The yield on the US Treasury 10 Year Note is now around 2.5%.  A 5% one month payout or buy the stock at an 10% discount to current prices is a WIN, WIN proposition.    


The high implied volatility makes option selling strategies attractive as pure probability trades that utilize time decay acceleration.  The April options have a month 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 10% lower for those who are at worst are comfortable holding on to an inexpensive stock to wait for a potential recovery. 



Portfolio Strategy


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 CLF is trading around $8.50. 



There are two rules that Cash Secured Puts traders need to follow to be successful.



Have the funds in the account to buy the stock at a discount if a stock selloff continues. 


The intention is to be assigned the stock, with each option representing 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 CLF April $8.00 Puts to open at $0.40 or better.  The cash secured Put sale would assign long shares at $7.60, a price not seen since November. 


If below the $8.00 strike at expiration CLF long shares are assigned costing $760 per option sold. 


The combination of time decay and 70% probability of CLF finishing above the $7.60 break even make the option sale attractive with a month until expiration. 



If CLF stock does move lower, buy the shares for 10% cheaper than the current share price.  In the event that shares are assigned at $7.60 basis, a May covered call can be sold against the stock to lower the cost basis again when you own it.   


Otherwise, you get paid not to… and get a 5% return on risk in a month.



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