Selling Puts - A Powerful Profit Strategy!

I wrote a couple of weeks ago about a Bear Market Rally, and although the Bear Trap has yet to be sprung, the time will come. When it does here’s a strategy you can use to boost your profits. The strategy is selling naked puts

I know, everyone thinks that selling naked options is very dangerous and risky, but if done right its no more risky than selling covered calls.

Selling puts is a strategy in which you get paid for agreeing to buy a specific stock at a specified price at a given time in the future. This idea works best in a down market where investors are scared and are willing to buy insurance for their stocks to guard against further losses. The best time to execute this strategy is when the VIX reaches the upper 30’s or higher. That is when the put option premiums are at their highest.

There are 3 things that can happen when you sell puts. The price of the stock goes up - you profit. The price of the stock goes no where - you profit again. Or the stock goes down and you have to buy the stock at the specified price, in this case you just bought the stock you wanted at a bargain price.

Lets take a look at an example: McDonalds (MCD) is currently trading around $57.50 but you’d like to buy it a little cheaper, you can sell a Dec $52.50 put option and collect a $2.35 premium per share or $235.00 per contract. Remember each option contract represents 100 shares of stock. So lets say MCD drops in price to less than $52.50 at option expiration. You will be obligated to purchase 100 shares of MCD for every option contract you sold. So your cost is $52.50 less the premium of $2.35 per share or $50.15/share. If MCD’s price rises, or stays the same or drops to a level not less than $52.50, then the option expires worthless and you get to keep the $235.00 premium. So as long as MCD remains above $50.15 you will be in profit. If you do end up having the stock put to you ( for this to happen MCD would have to fall almost 14.5%), then you can always turn around and sell a covered call against the stock and collect another premium and reduce your cost even more.

If your interested in this kind of trading you will need to check with your broker and be approved for option trading. Most brokers will allow you to sell puts on margin and put up only 20% of the trade amount. You can also do this trade in your IRA account but you will probably have to put up the full amount of the trade when the options are sold. The funds will be frozen and held till option expiration, so you won’t have these funds available for other trades.

You can find your own puts to sell by looking for safe companies that you’d like to own and then selling puts on them with a strike price that you’d like to pay for the stock. Don’t let fear hold you back you can get started by trying 1 option contract at a time until your more comfortable.

If you’d like to learn more about trading options check out Options University. and become a better investor. Or better yet get their Free Report “7 Deadly Mistakes People Make When Trading Options”

Good Investing

TC

Limiting Compensation??

I’m not one to discuss politics, but when I read that the Government is considering limiting executive compensation, it kind of makes the hair on the back of my neck stand-up. They are not only considering limiting the pay of those institutions that received TARP funds but also instituting broader mandates to limit compensation on all financial service firms.

Can this really be happening in the “Land of the Free and the Home of the Brave” the World leader of Free Markets, are we heading toward all out Socialism?

I am not a fan of what took place with companies handing out large bonuses after they have received billions in tax payer monies to keep them afloat. If these companies want to pass out their profits as compensation, so be it, the only ones this type of perfidy hurts are the shareholders. But don’t do it with taxpayer money.

I don’t profess to have a solution to this problem, but I do know this, I don’t want the government in my life any more than they absolutely have to be. I don’t want more government control, I’m looking for less. I’m not interested in giving away any more of my Freedom in lieu of more government control.
I’m an independent person, always have been and always will be. I have always fended for myself and will continue to do so. So lets knock off this nonsense about limiting compensation and all start taking care of ourselves.

Good Investing,

TC

Bear Market Rally - Look Out Below!

Have you been enjoying the recent 3 month rally in the stock market? I know I have been. I have stayed the course and my portfolio has risen from the abyss to an area where I feel much more comfortable. Since I wasn't completely faithful to my "trailing stops" I took a pretty good drubbing, but I have now recovered much of my losses.

But I think it may be time to head to the sidelines for a while.

Now that the markets have climbed nigh on to 30% “straight up” it could be time for the Bear Trap to snap shut. I hope not to get caught this time around and I’m going to start raising a little more cash. I’m not convinced that the bear market is over, unemployment is still rising, the dollar has been driven lower and many people have thrown caution to the wind.

Jeff Clark says: “The stock market is poised to collapse.”

“There's no other way to put it, and I'm hoping that sentence gets your attention. Your financial well being depends on it. Stocks are in dangerous territory. The rally over the past three months has done exactly what bear-market rallies are supposed to do – get everyone excited that a new bull market is underway.”

If you have any doubts that this is not just a Bear Market Rally then check out Jeff's full article “An Incredible Shorting Opportunity is at Hand” in the latest issue of the Growth Stock Wire.
It could open your eyes and save you from suffering another market collapse.

Good Investing,

TC