Today when the Dow was down less than 1% and COP had sunk to ~54.80 I entered into the following transaction:
09/05/12 STO 3 COP Oct 20 50 Puts @.38 $101.73
ConocoPhillips is a rising dividend, blue chip, oil & gas company. I have been waiting for it to show some weakness, i.e., drop below 55, as I love it's yield as a buoy for the stock price. Today I got my wish although I must admit that the lack of news was a bit disconcerting. Hopefully there are not problems brewing behind closed doors.
This is a 45 day trade that uses ~$1600 in margin maintenance. If the puts expire worthless I will earn 6.36% return on maintenance in 45 days or 51.6% annual.
If COP were to drop below 50 and the stock was put to us our yield on cost would be a whopping 5.3%. I like this yield amount as a buoy of the stock price. If the price tanks I feel confident that I could roll down and/or out for a net credit. As such, an exit strategy is in place.
I have been enjoying writing naked puts far out of the money because the maintenance requirement is so low. This allows me to enjoy higher returns on maintenance and to commit less capital to any one trade. In addition, the downside protection is very high making this a comfortable yet probably profitable setup.
thanks for your quick response to my questions chester. makes sense....i'll take some time and review your GDX trade. i'm also a fan of COP. have owned some of the underlying for a few years, but as i mentioned am new to options so haven't done any trading with it.
ReplyDeleteGbarbs, have you tried to paper trade options? As you can tell I'm a big fan of put selling so I would start with paper trading put selling. I recommend reading Jeffrey Cohen's book Put Options as well as Selling Put Options My Way by Jerry Lee. I would hope that they would be "Lightbulb City" for you. :)
ReplyDeletewell, i'm not totally new....started learning back in February. I am trying at this point to find a system that works for me. I did read Jerry Lee's book and it was light bulb city...need to get to a broker that is more friendly to his system though - tradeking holds more maintenance than most others and even more for selected stocks. I like his easy to follow filters, and especially the rule for exiting a trade going bad. Paper trading is tough for me. I feel like if I've done the work to find a good trade I want to get paid for it! And keeping the emotions out of it is easy when real money is not on the line so I don't feel like I'm getting real practice. I'll check out Cohen's book and will be checking in on the blog - thanks.
ReplyDeleteHi Gbarbs, haha, yeah paper trading is kind of unsatisfying....I liked Mr. Cohen's book better. Take care
ReplyDeletethanks. mr. cohen's book is on it's way from amazon
ReplyDeleteSounds like a good trade.
ReplyDelete