Stocks took a breather on Monday after the explosive Friday rally.
Investors, it seems, don’t think Fed Chairman Powell will tank the economy unnecessarily by jumping rates even further.
In a lot of ways he’s already succeeded.
Mortgages are effectively doubled back to 2008 levels. Stocks were down over 20% from the highs last year and back to 2021 levels. J-Pow even told Congress to stop spending money.
By some measures the USA is already in a recession due to a variety of things, Not least the doubling of gas prices in a year.
There are even hints the G7 might back down for a while on their Green agenda.It is possible to right the ship and some green chutes are there.
And I think this is a great time to understand the put write.
There are 3 things you should know.
Put Selling Is Dividend Play
The easiest way to think of put writing is a potential dividend for owning the stock.
Except …
- It is not a dividend
- There is no stock ownership
It is what’s known in options trading as a synthetic.
That may sound scary after the financial crisis of 2008, but it really is not.
A short put can produce an income if the put drops in value or goes out worthless. Much like a dividend. The stock needs to go up, stay still or can even drop a little.
If a put is assigned, the investor owns the stock at the strike price, less the premium collected, so there is always – and I mean always – a possibility of ownership.
My general rule for put selling is to collect 1% minimum of the strike sold. That means I need to collect .30 minimum on a 30 strike put as an example. 1% is the minimum, not the maximum, so I try to do better.
Altria Group Inc. (Ticker: MO) pays a dividend of around .90 per quarter and has sold off because of a stake in Juul vape products. I can sell MO Aug. 19 42.5s puts at 1.50. That is 1.5% per month approximately with an eventual .90 dividend per quarter.
Two-year stock price for MO
Keep these three things in mind when selling puts:
- Dividend stream
- Potential stock ownership
- % minimum yield per month
More on managing the put sales tomorrow.
The Lesson: Go into selling with the idea you will own the stock, and there are fewer surprises.
The Rundown
Big Money Flow
I closed some Xtrackers China Large Cap ETF (Ticker: ASHR) calls for BMF while Mark was on vacation for a 22% gain. I think China has more to run, too.
Option Shopper
Licia grabbed a mini shopper at Walmart Corp (Ticker: WMT) for a 3% gain
Option Pit Mentoring
I closed an iShares China Index (Ticker: FXI) strangle for a 9% gain.
To Your Trading Success,
AG