Options

Options EducationThis section is for those who are using option selling strategies:

  • cash-secured put selling for building stock positions and generating income
  • covered call writing for trimming positions and generating income
  • LEAP call buying for when large opportunities present themselves, such as after major corrections 

While we do not use call strategies often, we do use cash-secured put selling regularly. By taking advantage of people's emotions which cause volatility, we can often sell a cash-secured put on a stock or ETF we like longer-term and generate income while building a position as some of the puts get "put to us" meaning we buy the underlying security. It is a professional strategy that takes some getting used to, however, if you are a long-term investor with a contrarian streak who likes to add income to the bottom line, this is THE strategy worth learning.

Before making any options trades, read Characteristics & Risks of Standardized Options, study the CBOE Education Center and engage in paper (pretend) trading for an extended period before trading options.

The First Trust ISE-Revere Natural Gas ETF (FCG) is rising as a hurricane heads towards the U.S. While I am concerned of a further sell-off of about 10%, FCG is a position that we need to establish. We can move in that direction by selling cash-secured puts today for a fraction of a position. 

The upside in natural gas is fairly obvious at this point. A lot of projects have been curtailed for the next couple years, coal plants continue to make the switch to natural gas, natural gas exports have begun and the "bad" companies have been mostly eliminated from the index that FCG tracks. In addition, the fundamentals of the top companies in the index are pretty good and likely to get better:

The First Trust ISE-Revere Natural Gas ETF (FCG) is down today as options expire. While I am concerned of a further sell-off of about 10%, FCG is a position that we need to establish. We can move in that direction by selling cash-secured puts today for a fraction of a position. 

The upside in natural gas is fairly obvious at this point. A lot of projects have been curtailed for the next couple years, coal plants continue to make the switch to natural gas, natural gas exports have begun and the "bad" companies have been mostly eliminated from the index that FCG tracks. In addition, the fundamentals of the top companies in the index are pretty good and likely to get better:

I recommended initial purchases of First Solar and SunPower here: http://fundamentaltrends.com/investments/277-buy-sunpower-spwr-first-solar-fslr

Today I am expanding one of those positions as the solar sector shows capitulation. 

For those with a position in SunPower or just looking for a good income with growth play, SunPower (SPWR) is showing capitulation today. It could fall a bit more, however, these are clearly prices to want to buy at for the long-term. 

When asking yourself about buying a stock remember to ask this question: what will I wish I had bought today in five years?

This solar sell-off might be the last big one we see as solar earnings smooth out and just show 20-30% growth rates for the next decade.

The $8 December puts are selling for about $1.10 right now. Any premium over a buck is pretty darn generous and in my opinion misguided by short-term thinking of those betting and narrating against solar. 

If you already own SunPower shares, selling the December $8 puts will generate premium to either reduce your existing cost basis or you will buy more share in December which also lowers your cost basis.

If you don't already own shares and want to, I'd suggest selling puts to hold about 1-2% of your NAV and buy 1-2% of the stock.

Sell SPWR December $8 puts. 

 

Per our talk in the forum, I am buying stock in Silver Spring Networks (SSNI) a play on the smart grid. I am also selling puts to defray my cost or pick up more shares on downward volatility.

The company has already worked on some huge projects and is profitable. I believe they will continue to surprise to the upside. I think this is especially true given the energy bill working its way through Congress that is already approved by both houses and just in the pork packing process. The Bill will almost certainly be passed in the lame duck session.

Silver Spring Networks Inc provides networking platform and solutions that enable utilities to transform the power grid infrastructure into the smart grid. The Company operates in United States, Australia and rest of world. It is Zero debt, profitable, growing.

Here's are links for the Energy Bill of 2016:

www.nytimes.com/2016/04/21/us/politics/s...-infrastructure.html

www.congress.gov/bill/114th-congress/sen...ndments?pageSize=250

Buying SSNI to 1% of portfolio. 

Selling September $12.50 puts. I'm hoping to get 50¢ but will take 40¢.

Volatility is at a very low level despite going into a summer that could be very turbulent per my recent View - Volatility Could Get Wild this Summer

So, while we might see a continuation of warm and fuzzy, I think it is more likely we see volatility ahead of U.K. vote, Greek bailout review, U.S. election and around June OPEC meeting. Even if we get warm and fuzzy, the VIX is so low, it's worth starting to get involved with.

I am selling iPath S&P 500 VIX Short-term Futures ETN $14 July puts - just for a few percent of portfolios. I will add more if volatility keeps heading down. It can't last much longer.

For now, that's it, but as volatility picks up, option premiums will pick up too, when that happens, we'll want to sell puts across several ETFs and stocks we'd like to own, i.e. GLD, FCG, FSLR...