Retirement Income Options 4/20/21

Summary

  • Simplified format for Retirement Income Options with 5-10 focus trades per week.
  • The stock market is churning as liquidity becomes a smaller percentage versus total market cap.
  • Rising volatility raises premiums, but also raises you risk. Think through trades carefully for the potential impact on your asset allocation.

The weekly Retirement Income Options is a simplified piece to give you actionable option ideas for this week. Make sure to read the Using Retirement Income Options and Technical Trading Basics: Using Overbought And Oversold Signals To Buy And Sell before getting started.

See buy zones and bottom fishing prices in the constantly updated VSL. 

RIO

Stock Market Quick Thoughts

The stock market has been churning more and the “to the moon” investments seem to be landing. There is more value being created as non-meme stocks begin to be priced more reasonably. 

The stock market got to the shiny, round object of 4000 on the S&P 500 (SPY) (VOO). So, risk management is paramount as the opportunity set of good investments is shrinking. There are however, a handful of select cash-secured puts to be sold as we cherry pick.

The current condition in markets are broadly overbought and in a topping process. This means you should be trimming and selling covered calls on many overvalued stock holdings, especially since liquidity is tightening.

See how volatility has fallen (VXX). The next surge will be a good buying opportunity. Until then, cautious nibbling and selling cash-secured puts on oversold potentially “great” stocks.

The SPAC market has already gone from mania to valued about right. Speculating on pre-deal SPAC units around $10 per share is a fine idea and buying the post deal companies you like can also be very profitable long-term as some companies will bump the zombies out of the S&P 500 someday. Don’t run from SPACs because of noise, do the evaluations on a case by case basis. I am doing a pair of updates this week that cover pre-deal SPACs worth buying and post deal SPACs I believe have a lot of upside potential. 

Reviewing Cash-secured Put Trades

This chart if from Fidelity. It shows the basic idea around selling cash-secured puts.

In Fidelity’s example, there is a put with a $3 premium and a $100 strike price. There are 3 outcomes: 

  • The stock falls below $97 it is put to you and you are at a net loss. Despite being at a loss, you are still better off than if you had bought the stock at $100 per share without selling the put that you received $3 for.
  • The stock falls between $100 and $97 it is put to you, but you are still net profitable. This is the perfect trade for accumulating shares at a discount to today’s price. 
  • The stock rises above $100 and the option expires with your having just collected the premium. This is the consolation prize of selling puts, i.e. you get a heckuva a return on your money market funds. 

If you think about selling puts as a way to acquire discounted shares from today’s price, then you are doing it right. If you are focused on the premiums and get irritated with having stock put to you, then you should not being trading options at all. Period. Stop. 

Use this chart to work through your trades by writing the prices and premiums for your trades. 

Cash-secured Puts vs Covered Calls

Many people will tell you that cash-secured puts and covered calls are the same thing. That is not true. While similar, there is a huge difference that must be acknowledged.

If you think about options from the standpoint of the underlying stock, this will make sense to you. If you think about options as income first, then you will be confused. 

A cash-secured put is designed to get you into a stock. 

A covered call is designed to get you out of a stock. 

Since we only sell puts on stocks we want to own, we are just looking for discounts for buying those stocks. 

Since we want our winners to run until overbought and/or overvalued, we generally will have limited use for covered calls. In fact, when a stock of ours gets overbought and/or overvalued, it is generally more important to trim the position back to a smaller size than sell a covered call.

Usually, when a stock we own is overbought and/or overvalued you want to trim back the position and sell a covered call, while leaving a portion of your position unencumbered. Why keep some free and clear? So it can keep running in case the stock is even better than you thought or more loved than you thoughts possible.

Focus Cash-secured Put Trades

Invesco WilderHill Clean Energy ETF (PBW) is potentially the best ETF on the market and poised for long-term secular growth. We want to find a way in.

PBW is flirting with oversold on the daily charts and below the midpoint on oversold weekly. I’m not sure we’ll see outright oversold on the weekly. 

There is strong support in the the $70s and upper $60s. So, we want to try to get a purchase price net of premium in that range.

Sell the $78 June put for over $4. Use a gtc order. Adjust the premium price higher before the open if you see a big down day developing in futures markets. 

ViacomCBS (VIAC) is a buy for all the reasons previously covered and selling pressure from impacted banks from the hedge fund collapse has abated. If you haven’t sold puts on this one yet, then do so. I am selling puts to the point that Viacom becomes a full 3-4% position if put to me. 

Sell June puts in the $35-$40 range at the ASK. 

Discovery (DISCA), see VIAC. 

Sell June puts in the $35-$40 range at the ASK.

Quidel (QDEL) is oversold on the weekly and an M&A target. 

Sell $110 June puts for over $10. Use a gtc order. Adjust the premium price higher before the open if you see a big down day developing in futures markets.  

AST SpaceMobile (ASTS) is oversold on the weekly. If you have the nerves of an astronaut, then sell puts on this one. If the company’s 1000+ patents cell towers in space tech can be deployed (I don’t want to bet against science), this could be a among the “life changing” investment stories in 5-10 years. Mind your asset allocation if you try to ride this one.

Sell $10 June puts for over $3. Use a gtc order. Adjust the premium price higher before the open if you see a big down day developing in futures markets.  

OnTrack (OTRK) is oversold on the weekly and I think poised to be a major player in telehealth delivered, AI monitored mental healthcare. 

Sell $25 June puts for over $1.50. Use a gtc order. Adjust the premium price higher before the open if you see a big down day developing in futures markets.  

Teledoc (TDOC) is also a long-term winner in telehealth. However, it isn’t quite where we want it yet, but can get there quickly. 

Sell $170 June puts for over $10. Use a gtc order. Adjust the premium price higher before the open if you see a big down day developing in futures markets.  

MP Materials (MP) is part of an emerging oligopoly in North American rare earth metals and magnet production. Big support in lower $20s. 

Sell $25 June puts for over $3. Use a gtc order. Adjust the premium price higher before the open if you see a big down day developing in futures markets.  

WeWork (BOWX) is worth far more than current share price based on steady revenues and dramatically lower expenses. I think a likely double to triple given that over half of business is now enterprise with leases over a year vs month to month small players. Prone to high volatility for now, but I think big players are moving in based on steady buying from late March announcement to last week. 

Sell June $12.50 puts for over $1.50 to get net price of $11. Use a gtc order. Adjust the premium price higher before the open if you see a big down day developing in futures markets.  

Disclosure: I am/we are long PBW.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own or sold puts on all holdings mentioned.

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