TCK STOCK Put Selling Volatile Stocks And When To Close

TCK Stock is widely held and rightly so. Teck Resources Limited (select this TCK Stock link to view Tech Resources Investor Relations) has interests in Alaska, Washington, Alberta, British Columbia, Newfoundland, Chile, Peru, Mexico, and Minnesota. It is a diversified metals and mining company with a track record of solid earnings. TCK Stock has excellent option premiums and volatility keeps the stock moving in wide swings which makes for higher option premiums. The wide daily swings also keeps day and swing traders interested in the stock.

In the past 52 weeks TCK Stock has been as high as $64.62 and as low as $27.39 on the Toronto Stock Exchange. On the TSX it trades as TCK.B stock. TCK.B Stock has earnings of $3.14 for the past 3 quarters and analysts are expecting $1.08 for the final quarter of 2011. Presently TCK.B Stock is trading at just 9.3 times earnings while the industry average is 15.6.

I recently received a request from a reader regarding his TCK.B Stock Puts Positions. I want to thank him in advance for his donation for the time I spent writing this report for him.

ALL FIGURES IN THIS ARTICLE ARE IN CANADIAN DOLLARS. The Reader is holding Canadian Stock Puts against TCK.B Stock which is the symbol in Canada for Teck Resources Ltd. TCK Stock is the symbol in New York.

Here is the reader’s question on TCK.B Stock

Hi Teddi;

Please can I have your comment on this trade that I am in:

-TCK.B was at $36.63 on Dec 13 2011 when I sold puts for 21JAN12 at the $37.00 strike for $2.34. I received $2318.00 in my account when I sold the puts. Today the put I sold could be closed for .91 cents (the ask).

Should I buy to close the put now and then sell to open the 18FEB12 $37.00 put which is trading for $1.75 for a net income of $800.00? Is this a GOOD Strategy or should I wait till 20 JAN12 and either do A ROLL FORWARD or let it expire?

TCK STOCK MY ANSWERS

It is important to understand why investors are interested in stocks such as TCK Stock. The reader is holding 21JAN12 10 TCK.B Stock PUT $37 Contracts which he sold Dec 13 2011 when the stock was at $36.63. He sold the put for $2.34 or 6.3% for one month risk.

I am writing this article between Jan 9 to Jan 11 2012 with TCK.B stock trading for $38.65. The Feb 2012 $37 put is trading for $1.30 or 3.5%. The $39 Feb 2012 put is trading for $2.17 or 5.5%. These are high put premiums that reflect the volatility of TCK.B stock (TCK Stock on NY). Many commodity stocks are similar. So while option premiums are large so is the risk of assignment. Nothing is ever free in investing. Premiums reflect the risk of assignment. Therefore it takes a certain type of investor to sell puts or even invest in this type of stock. However using the proper tools can help an investor to profit from selling puts against volatile stocks.

Let’s do a review of the charts for TCK.B Stock (TCK Stock in New York)

TCK.B Stock Jan 2011 – Jan 2012

The stock has had a wild year. It declined 57.61% from January to early Oct and has now risen 41.1%.  Most days TCK.B Stock (TCK Stock on NY) will trade between 2.5% and 4.3%. This is why day traders and swing traders like this stock. It is also why option sellers try to time entry and exit times to sell options and avoid being assigned shares.

TCK STOCK 1 YEAR CHART

TCK.B Stock Jan 2011 to Jan 2012 TSX CHART

TCK.B Stock Jan 2007 – Jan 2012

This chart also reflect why many traders love stocks such as Teck Resources. In 2008 TCK.B Stock (TCK Stock on NY) collapsed losing 92.5% of its value. Short sellers and put buyers loved this stock. In Feb 2009 it began a climb from a low of $3.96 which saw a rise of 1084% to $46.92. These are the kinds of stocks that keep many investors up at night. However investors with experience turn large profits with these types of stocks.

TCK.B Stock 2007 to 2011 Chart TCK Stock

TCK.B Stock Chart from 2007 to Jan 2012

How To Sell Puts On High Volatility Stocks

How would an investor sell puts and then know when to close puts on a stock like TCK.B (TCK Stock on NY)?

SPREADS

A lot of investors would consider spreads. Selling a put and then buying a protective put on a stock like TCK.B (TCK Stock on NY) makes a lot of sense. For example today, Jan 10 2012, an investor could sell the Feb $37 put for $1.30 and buy a protective $34 put for .65. The return though would be just $1.30 – .65 = .65 or 1.7%. A far cry from the 3.5% sell the Feb $37 naked creates.

It is for this reason that I have always tried to stay with stocks that do not need spreads to have some protection. I see little value in putting together a spread to try to earn 1.5% or 1.7% returns when the purpose of put selling volatile stock is to earn large premiums. Often I can earn 1.5% on an easier put sell on a less volatile stock. However that’s just my opinion and I know many others would disagree and do prefer spreads.

Selling Month To Month Naked Puts

Instead an investor could take a different approach.

The investor who wrote me wants to sell month to month. This means his concern is limited to 30 to 45 days out in time. While this is still a long way out in time he could use a couple of methods to calculate what strike to sell. Through technical indicators who could also time when to sell puts as well as when to buy to close and lock in his profit.

Picking The Put Strike To Sell

With a highly volatile stock such as TCK.B (TCK Stock on NY), I look back usually a couple of years. Below is the period from Nov 2009 to Jan 2012. While volatile, by looking at the range in the stock we can see that the low is around $30.00 and the mid range where selling puts still makes sense is around $40.00. Anywhere above that an investor would have to be very careful. Within that range the perfect spot is $35.00. Therefore for much of the time period an investor could have safely sold the $35.00 put. The chart shows how often the $35 strike was within the stock’s trading range.

tck.b stock 3 year chart

TCK.B STOCK Nov 2009 to Jan 2012

Why Selling The $37 Put Makes Sense

At $37.00 the reader who wrote me might be a bit aggressive, but to be in a stock like TCK.B (TCK Stock on NY), you have to be more risk oriented so it makes sense that he chose $37.00. If the stock fell to $30.00, the investor has a good chance that the stock may recover back beyond $37.00 which would place his put out of the money again. When the put was in the money the investor could sell puts and keep rolling to stay ahead of assignment. For example, if the stock was at $35.00 by the time Jan 2012 options get close to expiring, the investor could buy to close the Jan $37 puts and then sell the Feb $37.00 without much worry about assignment. In Feb if the stock was at $34.00, the investor could again buy to close the Feb $37 and sell the March $37 and once more assignment is unlikely. He could probably continue this strategy until the stock recovered beyond his $37.00 strike and then close his trade for a very good profit, assuming that the bottom range of the stock holds.

When The Bottom Range Breaks

However, let us say that the investor sold the March $37 put and by the end of Feb the stock fell below $30.00. The chance of assignment is much higher. In that event it would be wise to buy to close the March $37.00 puts a couple of week earlier and roll to May (two months out) and down to $36.00 or even $35.00. This should still provide a profit. Therefore based on the above chart while I prefer $35.00, $37.00 is a reasonable put strike to sell. It all depends on how much risk of being assigned the investor is willing to take.

When the $37.00 put strike was sold, the reader earned $2.34, so he is protected from $37.00 less $2.34 down to $34.66 for a break even. This too has to be taken into account. He has a reasonable amount of protection.

Buying To Close Sold Puts Early

In his email to me the reader asked if buying to close the put early was a GOOD strategy (as he put it) or should he wait until closer to expiry, which would be in 8 trading days.

Part of the answer to that question is the investor’s goal and his overall objective.

The 75% Rule

If the objective is to NEVER own any shares then I use the 75% rule. When a put I have sold can be closed for 75% of what I sold it for, I close and look for another opportunity. For example, the reader sold the Jan $37 put for $2.34. The 75% rule means I want to earn $1.75 of that trade. Therefore I would put in my offer to close for .59 cents. At .91 cents, which the reader mentioned in his email as consideration for closing, there is not enough premium earned so I do not close.

The stock fluctuates a lot, so any investor has to be aware that he has sold a put (the $37 strike) which has a good chance of being in the money at various times throughout the year. This is the risk the investor must be willing to take to earn such high premiums.

Since I use the 75% rule, after I have sold my puts I IMMEDIATELY place my order to buy to close at .59 cents and mark it good until Jan 13 2012 or one week before options expiry. This FORCES me to close my trade which could happen early if the stock shoots up. Recalling that this stock can swing 3 to 4 percent easily every day, there is always the chance that I could get an early close.

On Volatile Stocks I have used the 75% rule very successfully. It leaves enough premium in the put option that the stock does not need to climb very high. At .59 cents I am leaving 1.6% behind for another put seller. (.59 / $37 = 1.6%) However by the Friday before options expiry I watch the trade daily for opportunities to close.

If the trade is in my favor by the Wednesday before options expiry with little chance of assignment I never close but let it expire.

By Closing Early I Can Immediately Move To Another Trade

If I close the put trade early, my capital is immediately available for another trade. For example on Jan 6 2012 I could have closed for .59 cents. Two trading sessions later on Jan 9 the stock fell to $37.44 and I could have sold the Feb $37 for $1.80.

By having my capital available prior to the options expiry, I can then sell into the next month and reap the advantage of more time premium. As per the example above, with 8 trading sessions left until January options expire, Feb put options are still prime for the same put strike despite the rise in the stock, because there are 8 extra trading sessions before Feb options expire.

Use the 10 Cent Rule On Volatile Stocks

I am a very conservative investor who believes strongly in watching risk, which is why the 75% rule works for me. An investor can pick whatever percentage they are comfortable holding for, whether it be 75% all the way to 99%, however when a sold put option on a highly volatile stock gets down to .10 cents with still a week to options expiry, I wold close, lock in my profit and look out to the next month for put selling opportunities when the stock takes a dip.

Market Technicals Can Also Time When To Get Out

As explained in many articles on my site, an investor can also use market technicals to predict when the underlying stock, in this case TCK.B Stock may have stalled out. You want to close your puts while the stock is strong and then wait for dips in the stock price to sell the next month’s puts. Here are some simple indicators I use.

Watch The Daily High And Low

Plot each trading session in a chart and watch the daily high and daily low in the underlying stock. For example, below I can see that in the latest rally TCK.B Stock got up to $38.97 on Jan 4. I immediately plot that as the daily high and daily low that the stock should hold. Note in the chart how TCK.B Stock did not break into a new high. Three trading sessions later on Jan 9 2012, the stock broke the previous low. This is a warning sign. The following trade however is holding above that low but not pushing into a new high. Again a sign that the stock is probably stalling. However as long as the previous low holds, a put seller can keep an eye on the sold puts and try to squeeze more premium as long as the put is out of the money, which in this case, being the $37.00 strike,  it is.

Pick the put strike premium you want to close for and remain consistent. Remember that more put trades have gone sour in the last-minute when selling puts at the money, then those that were out of the money to begin with. Often trying to get that last .10 or .15 cents is not worth the risk.

Also remember that each day the stock stalls means that the put premiums for the next month out at the same strike are also decreasing in value. Watch both the current month and the next month you want to sell puts in, for the best moment to buy to close the one month and sell to open the next.

Tck.B Stock Watch The Daily High And Daily Low

Tck.B Stock Watch The Daily High And Daily Low For Signs Of Weakness

 

Watch Momentum In The Underlying Stock

To watch momentum in the underlying stock add these 3 technical timing indicators, Volume, Momentum and MACD Histogram. I have marked A, B, C, D, E on the chart and the corresponding Momentum readings on the chart below.

TCK.B Stock - Watch Momentum
TCK.B Stock – Watch Momentum With These 3 Technical Indicators

What They Are Telling Investors

A) Is showing good volume and will become the cornerstone for this latest rally in the stock.

B) Shows that despite the rise in the stock there is not as much volume. However Momentum shows a rise from 101.19 to 104.70 which is excellent, so momentum is still rising.

C) Shows that sellers are moving in but momentum is still rising at 108.36, so despite the sellers there is still demand for the stock.

D) Shows that the previous sessions saw more sellers but now despite the rise in the stock the demand for the stock is slowing and sellers are still in control. Note how the dramatic rise in momentum is slowing. It is still higher but the reading is not as dramatic a change as prior trading sessions.

E) Shows that there are lots of sellers and fewer buyers. Therefore they pushed down the stock. Momentum reflects this with a reading of almost flat from the previous day. Note though that the reading is not lower. A flat reading is warning the stock could be stalling here or perhaps being accumulated for the next push up. Remember that this trade is not in the stock but the sold puts. Therefore as long as the momentum readings stay flat the sold put premiums will decline with each session grinding closer to options expiry in just 8 more trading sessions.

MACD HISTOGRAM:

The MACD Histogram can easily be glanced at to confirm your other readings. The histogram throughout the rally has stayed pretty flat without even studying the MACD histogram daily readings. This means that the present rally has not a lot of conviction but as long as it stays fairly flat, every day put option premiums will decrease as the stock stalls out.

Add The Ultimate Oscillator And Fast Stochastic

If you want to go deeper into confirmation, add two more technical indicators, the Ultimate Oscillator and Fast Stochastic. Below are both of those and my settings for each. I have marked the Key points of A, B and C.

Tck Stock Ultimate Oscillator and Fast Stochastics

What They Are Telling Investors

A) The quick rise in the stock created an overbought condition. This could account for the stalling of the stock.

B) Indicates that while the stock is stalling, it is working out this overbought condition. This means if the stock does not fall, it could be moving higher. THIS GIVES SUPPORT TO THE TRADE OF SELLING THE FEB $37 PUTS NEXT. Therefore based on B NOT FALLING but moving sideways I would be tempted to sell the Feb $37.00 put NOW or if you are a risk taker even the Feb $38 put, on weakness AND continue to hold the Jan $37 put a bit longer.

In other words, the ultimate oscillator is telling me as an investor that it may be prudent to consider using margin and selling the Feb $37 put now on a decent dip because if the stock moves higher the Feb put premiums will be less by the time my Jan $37 naked puts expire. It is also advising there is no need to buy to close the Jan $37 naked puts but continue to hold them and led time waste away at the Jan $37 put premiums.

C) The Fast Stochastic crossing, marks the stalling in the stock. What an investor wants to look for is a clear signal that the stock is going to fall lower. This clear signal has to be a sharp move lower one day followed by another day LOWER. This did not occur.

At this stage in the put trade there are warnings that the stock could fall. It needs to break the most recent daily high and definitely not set a new daily low from this last little rally. However the sideways action could easily be buyers picking up the stock and getting ready to push the stock higher. While so many sellers have moved out of the stock as witnessed in volume above, despite the selling the stock held up well and therefore could be getting ready for another move up.

TCK STOCK PUT SELLING TRADE SUMMARY

The important job is to plot out the daily technical indicators and watch for the signs of weakness in the stock and make sure this weakness does not escalate as the stock moves closer to options expiration. The Ultimate Oscillator is advising that it could be a good trade to sell puts for the next month out on recent weakness NOW and NOT Wait, to take advantage of time premium and if no capital is available, use margin.

Remember that your trade is selling puts. You are in a different camp then the investors of the stock. Overall as long as the stock stays buoyant and above your strike it becomes a waiting game. Trying to squeeze the last few nickles and dimes out of such a volatile stock is risky at best unless the stock is rising and making a new daily high or at least NOT BREAKING the RECENT DAILY LOW.

Instead as the trade winds down towards options expiry, turn to eyeing the next month’s put option trade and consider selling the next month’s puts on weakness. Selling above $37.00 would not be my choice as commodity stocks are known for their wide swings, but then I am conservative and not aggressive when selling puts.

By selling puts on a volatile stock like TCK Stock (or TCK.B on the TSX), you are being rewarded with higher put option premiums. In exchange for that comes higher risk of either having to close for large losses or being assigned shares when you actually do not want any shares.

The larger gains in put premiums means more work. An investor should daily take time to plot out the timing indicators and watch for warning signs of a change in trend. The investor should set clear goals as to where they will accept closure on the trade and lock in their profits. Earning anywhere from 3 to 6 percent in a month and leaving behind half or 1% is nothing to be concerned about. Even earning 2% a month on a trade like TCK Stock put selling is a fabulous return which if it can be done consistently means excellent annual gains for a portfolio.

BE REALISTIC

For that consistently to happen, an investor who sells puts on highly volatile stocks needs to be realistic about the risk engaged in and take profits when they are there and never second guess his decision. A profit is a profit, period.

By watching the present month and using indicators to prepare for the next month, while always being aware of the price level the stock is trading at, an investor can do well in volatile stocks. It is important though to realize that as the stock climbs into over-valued territory, which volatile stocks always will, the risk of being caught in a severe downturn climbs. Therefore as the stock rises my strategy would be to selling further and further out of the money until it makes no sense to do so. At that time I would leave TCK Stock and turn to other stocks for your put selling income while waiting for TCK Stock to fall back into a better trading range making put selling again profitable and reducing the risk of share assignment at too high valuations.

  • Dan

    You have a great website and provide a lot of valuable information to your readers. However, I must point out what I consider as an error in your calculations. In the paragraph on Spreads, you state:

    “The return though would be just $1.30 – .65 = .65 or 1.7%. A far cry from the 3.5% sell the Feb $37 naked creates.”

    The return on the 37/34 spread referenced I believe is 27.6%, not 1.7%! ($1.30-.65)/(37-34-.65). This is due to the fact that the amount at risk is only $2.35, not $37. That is a significant benefit of using a spread vs. a naked or cash secured put. With a much lower amount at risk on the spread, it is possible for the same amount of capital exposed as selling a put to either sell more spreads, diversify risk by selling spreads on other companies or to simply lower the amount at risk in the trade.

    While there are certainly reasons to use puts vs. spreads, it is not because the return is worse on properly chosen spreads.

  • When it comes to spreads I like to compare Apples To Apples as they say. While I realize that many people who do spreads believe the amount at risk is a set amount, the truth is inbetween. When the protective put is bought the loss on the trade supposedly is capped, however if the trade falters but fails to reach the protective put the investor can close the put for a substantial loss or put capital to work to accept assignment of shares and then sell calls to try to be exercised out of the stock.
    The real purpose of a spread is to have protection and try to limit losses. I realize that spread traders love to quote this large amounts such as your 27.6% based on what they perceive as their total capital at risk, when in fact the amount of capital in case of assignment is still the same. If the stock falls below the protective put then the investor can take his substantial loss and close the trade if he wishes.
    In my portfolio I sell puts against large caps that I would own at prices I sell the puts at. I suppose I could use huge percentage numbers as well to show remarkable returns if my puts expire out of the money. Many investors due, particularly those that use large margin amounts.
    I like to be realistic in my outlook. Until the trade ends the amount of capital that I may need could be a lot more than $2.35. The $2.35 is the ultimate risk of the spread puts sold and bought, but not the total risk of the trade. When selling spreads the capital outlay might surprise those who end up with a failing trade, but not one that reaches the protective put which expires worthless leaving the investor with either a loss or assigned shares which will require a capital outlay of the same amount as the naked put seller at the same strike.
    Teddi

  • When it comes to spreads I like to compare Apples To Apples as they say. While I realize that many people who do spreads believe the amount at risk is a set amount, the truth is inbetween. When the protective put is bought the loss on the trade supposedly is capped, however if the trade falters but fails to reach the protective put the investor can close the put for a substantial loss or put capital to work to accept assignment of shares and then sell calls to try to be exercised out of the stock.
    The real purpose of a spread is to have protection and try to limit losses. I realize that spread traders love to quote this large amounts such as your 27.6% based on what they perceive as their total capital at risk, when in fact the amount of capital in case of assignment is still the same. If the stock falls below the protective put then the investor can take his substantial loss and close the trade if he wishes.
    In my portfolio I sell puts against large caps that I would own at prices I sell the puts at. I suppose I could use huge percentage numbers as well to show remarkable returns if my puts expire out of the money. Many investors due, particularly those that use large margin amounts.
    I like to be realistic in my outlook. Until the trade ends the amount of capital that I may need could be a lot more than $2.35. The $2.35 is the ultimate risk of the spread puts sold and bought, but not the total risk of the trade. When selling spreads the capital outlay might surprise those who end up with a failing trade, but not one that reaches the protective put which expires worthless leaving the investor with either a loss or assigned shares which will require a capital outlay of the same amount as the naked put seller at the same strike.
    Teddi