TRADING PLANS 2017 CASH-SECURED PUTS AND COVERED CALLS. Starting 1900 CT tonight

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Randell Riley
5 years ago
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1 1 TRADING PLANS 2017 CASH-SECURED PUTS AND COVERED CALLS Starting 1900 CT tonight

2 2 Goals for Tonight What I d like to do in subsequent Wednesday evenings is to share with you my trading plans for This a follow-on from the January 7 Plan or Get Slaughtered class. Want you folks to perhaps get some ideas for your own plans, not necessarily copy/paste. Questions

3 3 Again, before I start. I m sharing my strategies/plan with you as I refine/improve mine for This presentation will help you if you use this as inspiration/ideas for your own plan, and go through the same process. This content will be a massive source of frustration and trading losses if you just copy/paste/trade.

4 1) What Do I Need to Fix for 2017? 4

5 5 First off, a little lingua franca. Tonight I ll discuss Cash-Secured Puts and not Naked Puts.

6 6 The implication with a naked put is that you do NOT have the capital necessary to absorb assignment, that you re just looking to swing the short put on a margined basis.

7 7 So, I only trade these positions with capital set aside for the position for when I am assigned.

8 Stocks are also kind of expensive now! 8 It was a great trade across the board at these levels!

9 9 This puts us into a quandary with this strategy; are we to buy the all-time highs with a reasonable expectation that they will go higher?

10 10 I don t currently sense (unlike gloom-anddoomers) that markets about to drop like a rock, yet I cannot in good conscience buy an asset at all-time highs, no matter what William O Neil or Jessie Livermore said!

11 11 So I am forcing myself to be a little more creative in the near term.

12 2) The Cash-Secured Put Trade 12

13 13 I try to keep the rules as simple as I can for this strategy, and the result has been a goodperforming, easy-to-manage trade.

14 14 What I will say is that patience and a willingness to take the long view has been invaluable.

15 15 Entry Rule #1: You must be a committed buyer.

16 16 You have to WANT to be assigned the stock! No cold feet or chickening out! You either want it or do not want it.

17 17 Entry Rule #2: You need to determine a price at which you would be a committed buyer. What is it worth to you?

18 18 Usually I will determine this on the chart, at an area that creates a lot of support.

19 19 For GE this would currently be at around the $28 price level. Where is value being defined?

20 20 Now the great thing is with a cash-secured put, you don t have to BUY the stock at that level, just sell a put option.

21 21 Here s where we re going to do the opposite of the Herd, we will sell our puts on pullbacks that give us an opportunity to sell at that strike price.

22 22 Entry Rule #3: Sell on pullbacks at or below your price and secure AT LEAST a 1% return.

23 23 Let s say that we wanted INTC at or below $32/share. November 4 offered a nice pullback.

24 . 24

25 25 The whole point of this is to sell again and again and again and continue to drop your cost basis. Do it enough and it s possible to create a zero-risk position.

26 26 Cash-Secured Put Rules for 2017 Stocks paying a dividend of at least 1% can be a good starting point. Look for charts in established uptrend (not parabolic!) and no bottom-picking unless you re good with price action. Determine a value level for that stock. Look out 30+ days; can you sell a put for at least a 1% return? No? Wait on pullback and vol spike.

27 27 Cash-Secured Put Rules for 2017 How much capital to use? I will set aside 5-10% of capital for that stock. Many times the entries will correspond with a daily exhaustion level. RISK?! Determine a GET OUT price point where the monthly trend is violated. This evacuation point should be set up before any entries, and does not matter whether you are in short puts or own the stock.

28 Where would INTC have to drop below in order to violate monthly trend? 28

29 Where would GE have to drop below in order to violate monthly trend? 29

30 30 If I could, I would just sell puts without assignment. It s so much easier, and you can leapfrog cycles.

31 Example: TWTR 31

32 32 Eventually I do get assigned and I am the proud owner of that stock. Now we get to rent it out.

33 3) The Covered Call Trade 33

34 First off, one rule to rule them all.. 34

35 I do not believe in doing buy/writes. 35

36 36 A buy/write is where you purchase the stock and then immediately write a call against it.

37 37 The Buy/Write means that you think that the price is going higher immediately and you want to get on board, yet you are capping your gains.

38 38 I get it. In most cases it s a nice 3-5% gain. But there are far more efficient ways to earn that return.

39 39 OK, so now you have the stock. How should you go about selling calls?

40 40 First off, the call premium is not going to be as rich as the put premium. In many cases your short call will be pretty close to the price.

41 41 We can do the opposite here, and wait to sell the call into resistance/exhaustion.

42 42 Many times I will sell the ATM call into exhaustion to collect a larger premium. I do not care if I get called out.

43 43 Covered Call Rules for 2017 Best setups occur when daily chart FE is showing exhaustion on rally. The goal is to allow the price to rally above your cost basis so that you secure some capital appreciation on the stock in addition to the premium income. Many times I will split up the contracts to different cycles/different strikes. This is valuable when we get a parabolic rally.

44 44 Covered Call Rules for 2017 The only times that I will close down the position early are when the price is right ATM near expiry, and I have the chance to roll horizontally and collect another big credit...or the price of the stock is falling below my get out level.

45 45 What do you do if the position goes underwater?

46 46 Very important to keep track of your aggregate cost basis, so you know what levels that you can sell against, get called out, and still remain net positive.

47 47 I will sell calls that are below my assignment level, using the same technique of selling into exhaustion.

48 4) Searching for Candidates 48

49 49 Again, we want to enter the position through the short put first.

50 50 I will look for stocks that are running for $50 or less, and pay a dividend. We can also look for stocks on this list that are showing an exhaustion signal to the downside.

51 Jump to Scanner 51

52 52 One last thought; you can flip the traditional long trades around and run this strategy bearish! This might be a great way to set up for the next downdraft, just be aware that you will be wrong for a long time before payday. (duration over direction)

53 Check out Don s class in the Archives! 53

54 Questions? 54

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