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Why Sell Puts
Example Trade- Selling Puts
Tools For Picking Naked Put Strikes
Selling Puts Is Superior To Covered Calls
Understanding The Naked Put
4 Basic Rules For Selling Puts
Selling Puts For Profit & Avoid Assignment
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Put Ladder On Barrick Gold Corp
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Jul 9 2011 / Strategy Article

4 Basic Rules For Selling Puts

RULE # 3 - Check The Moving Averages

NDEX
Rule #1

Rule #2
Rule #3
Rule #4
 

My 4 Basic Rules For Selling Puts (Naked Or Cash Secured)

 
Rule #3 - Check The Moving Averages

I always check the 10 day simple moving average (SMA) against the 20 and 30 day exponential moving average (EMA). If the 10 day SMA has crossed and is moving below the 20 and 30 day, I usually wait for the 10 day to flatten out or turn sideways or up to indicate to me that the stock may have stopped falling before selling puts. This makes it more likely that I may not be assigned on the puts I have sold. In other instances, it provides an opportunity for me to sell slightly in the money puts for better premiums with an opportunity that the stock may have bottomed and will move back up, again leaving my puts out of the money and not assigned. 

You can read this article on the moving averages trading strategy to understand more about how the moving averages strategy works.

Here are some examples of applying Rule #3.

The first example is Exxon Mobil (XOM) from 2007. Using the moving averages depends on the goal. If the goal is to sell covered calls and earn a higher premium, selling the call while the 10 day is moving up and then turns, brings in very good premium. For selling puts the opposite is considered. The 10 day SMA crosses the 20 and 30 day EMA and moves lower. When the stock has a good drop and the 10 day is flattening or sideways or turning up, that's the moment when I like to sell puts. If you look at the chart below I have marked the indicators that I follow to sell puts. For those interested in covered calls, I have marked where I would sell covered calls.

Exxon Mobil Stock - 2007 chart


This same strategy can be used by long term stock holders who want to earn option premiums from covered calls but hope not to be exercised out of their stock. Below is a chart of Royal Bank Of Canada stock (RY), on the Toronto Stock Exchange (TSX) for March to July 2011. If I was a long term holder of Royal Bank Of Canada stock, I would like to augment the dividend through selling covered calls. However selling covered calls can often lead to the stock being exercised by selling calls without actually studying the charts. In the chart below I can see in mid January 2011 that the 10 day SMA, crossed the 20 day and 30 day EMA. By waiting for the 10 day to flatten out or turn sideways I can then sell covered calls with less risk of assignment.

In the instance below for example, I could sell the March 15 2011 Royal Bank April $60 strike for $1.00. Done a couple of times a year, combined with the dividend of $2.16, could earn $4.16 in income with not a lot of work involved.

Royal Bank Of Canada Stock 2011

For those investors looking to get into the stock, but not right away, the opposite is true. They can follow the 10 day SMA as is falls, following the stock lower. When the 10 day flattens out, turns sideways or turns up, selling puts makes a lot of sense. In the above example, on June 16 2011, an investor could have sold the July $54 put for $1.30, reducing their entry cost in the stock to $52.70. With a dividend of $2.16, this creates a 4% dividend return.


One last chart to look at. This chart is Google Stock (goog) for July 2010 to July 2011. Many investors like to purchase the stock and sell it following Rule #3. In this example the investor spots the stock down signal, waits for the 10 day to turn up and buys stock. He then follows the 10 day up until it begins to flatten out, turn sideways or turns down. Depending on the investor, he may sell a deep in the money covered call if he wants to generate some additional income just in case the stock is not going to pull back but move higher. Other investors simply sell the stock and wait for another downturn, follow the 10 day SMA and get ready to buy stock again to repeat the entire process once the 10 day stops falling.

Google Stock Chart July 2010 to July 2011

 

Summary Rule #3

By using Rule #3, I can better judge my moments to sell puts. Other investors as you have seen, can use Rule #3 to assist their investing philosophies. One advantage to Rule #3 is the number of times it has helped me not to sell puts as the stock is falling only to discover the stock has further to fall. Instead by following the rule and waiting for the 10 day to flatten out or turn sideways or up, I have a better chance to be selling puts with a reduced chance of assignment.

Article Index
Go To Rule #1
Go To Rule #2
Go To Rule #3
Go To Rule #4

Related Articles
13 Rules For Selling Puts For Profit And Avoiding Assignment
Understanding Selling Puts
Selling Puts Is Superior To Covered Calls
Tools For Picking Naked Put Strikes
Why Sell Puts

 

 
 

 
 

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