OPTION WHEEL IN ACTION – 13% potential return if SHLD is above $7.00 on July 21st expiration
STRATEGY: Sell cash secured put, get shares, create covered call, REPEAT…OPTION WHEEL
NEW ALERT Adjustment: SELL July $7.00 SHLD Covered Calls @$0.40 for each 100 long shares to lower cost basis to $6.20.
SHLD long shares were assigned at $6.60 from the June option sale to buy stock at a 17% discount to where stock was trading.
13% return if called out at expiration July 21st with stock above $7.00.
View Original May 26th Trade Below:
SUPER STRUGGLE SALE…New Trade Alert for Sears Holdings
SHLD CASH SECURED PUT SALE
Sell June SHLD $7.00 Put @$0.40 or more to open
DO NOT SELL CASH SECURED PUT UNLESS YOU WANT TO OWN STOCK AT DISCOUNTED LEVEL
Risk Rating: 4.25 (1 = lowest 5 = highest)
Above Break Even Probability: 75%
Let option expire for 6% return on risk or get long Sears Holdings at $6.60.
HIGH PROBABILITY 6% potential return in three weeks
BUY SHLD 17% 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.
Sears surged Thursday up 15% with short sellers squeezed after smaller than expected quarterly loss.
SHLD stock has been slip sliding down marking a $5.50 extreme low in February. The stock is sideways between $6 and $14 since September with the $10 level an important price pivot to watch.
Action yesterday peaked just below that $10 mid point resistance with the top at $9.90
IT IS ALL ABOUT THE MATH
The option volatility at the 95% level makes the SHLD 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 6% in a month is attractive with a $6.60 breakeven at the option expiration.
Buying at an 17% 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 6% one month payout or buy the stock at an 17% 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.
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 SHLD is trading around $8.10.
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 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 SHLD June $7.00 Puts to open at $0.40 or better.
The cash secured Put sale would assign long shares at $6.60, a price not seen since February.
If below the $7.00 strike at expiration SHLD long shares are assigned costing $660 per option sold.
The combination of time decay and 70% probability of SHLD finishing above the $6.60 break even make the option sale attractive with less than a month until expiration.
If SHLD stock does move lower, buy the shares 17% cheaper than the current share price.
In the event that shares are assigned at $6.60 basis, a July 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 6% return on risk in less than a month.
IT IS ALL ABOUT THE MATH