Trade Alert – Breaking Support On CNR Stock Sets Up Milking The Cows Strategy – Apr 30 2015

Trade Alert – Breaking Support On CNR Stock Sets Up Milking The Cows Strategy – Apr 30 2015

Obviously my remaining short shares of the XIU are going to work out well today. The markets are definitely coming unglued here with the Dow down 226 points and the TSX down 114 points.

This also is creating some excellent trade opportunities and one of those is in CNR Stock.

The last trade I did was just a few days ago but this afternoon selling pressure erupted on the railway stocks again and Canadian National Railway Stock broke through its support at $78.00. The drop was not much, but it will most likely break still lower.

I will shortly be rolling down my $78 put strikes but I have already started to enter a new trade. The selling pressure is enough that the June 19 expiry options at lower levels are pushing higher. This afternoon I got a fill on the $72 put strike for June 19 expiry for .58 cents. This represents only .08% of a return but it starts the next set of puts on CNR Stock and at $72 I would definitely own shares and sell covered calls.

CNR Stock Chart to Apr 30 2015

The stock since reaching $78 has been trying to find a bottom. You can see in the chart that it has been trying to turn sideways. $78 is strong support but determined sellers can easily punch through and send it to the next support level which is at $76. That level is very light support. The next level of decent support is down around the $72.00 level which is 7.6% lower and which is where I ultimately am aiming to end up.

You can see in the chart below that the Accumulation-Distribution Indicator is still positive but getting ready to turn negative. Momentum is building to the downside. The stock must hold the $78 level or risk collapsing, I think, down to $72.

Building Downside Momentum - CNR Stock

Building Downside Momentum – CNR Stock

Covered Calls

For anyone still thinking of covered calls, I would want to be deep in the money if aiming for a buy-write. I would prefer to pick up stock at $78.00 and sell the June expiry $72 covered call for $6.60. This only returns .60 cents or 0.76% but I think the likelihood of the stock actually ending up lower is strong and this trade could probably end up with a buy to close of the June 19 expiry $72 covered calls in mid-May and then a roll out into July at the same $72 call strike. This trade has a lot of protection. Buy the stock at $78 and selling the June 19 expiry $72 call strike protects that trade down to $71.40. This could easily turn out to be a covered call trade that could be repeatedly rolled and then allowed to be exercised by September or even October this year.

The $78 Valuation

With CNR Stock breaking the $78 valuation, it creates weakness and nervousness among investors. Those investors who jumped into the stock as it approached $78 earlier this week will now begin to wonder if this was a good decision. That means they will probably start to sell out of their positions which will probably push the stock to break the $78 support level. If that happens, more sellers will arrive and they will keep selling which will push the stock down to at least $76 to start and probably $72 either sometime in May or into June.

Why Sell Puts Now and Not Wait

There is of course no crystal ball capable of reading exactly what may happen to the stock, which is exactly the reason why I like to start my trade early with a small handful of contracts sold. This way if I am wrong and the stock stays above $72.00, I am at least earning a return. If I am right and the stock slides further, I can add to my position which means my .08% return will grow to over 1% or more as I keep adding to the trade. Then I will start rolling forward at the $72 strike.

Milking The Cows Strategy

Investing in stocks, especially big cap stocks, is all about strategy. I take advantage of weakness and strengths to pick my entry points to build positions. I then use the “Milking The Cows” strategy which basically means I “milk” or keep rolling and selling the put strike for as long as possible and for as much as possible until either I am assigned shares or the stock moves so high that there is no point in selling the $72 put strike further.

This can be a basic strategy or a number of technical indicators can be used to assist in timing rolling out the trade. I will write more about this strategy in the future but for now the important aspect is to understand that I am selling puts at the price point I would own the stock at. Once that decision has been made, then I set up the trade to starting milking it for as much income as possible.

Applying the Milking The Cows strategy to Canadian National Railway Stock will be the plan now that support has broken. I will not stop until I just cannot earn any further income from the trade.

CNR Stock Trade Details

Trade Details: CNR Stock at $78.00

STO 3 Naked Puts June 19 Expiry at $72 put strike for 58 cents.

Disclaimer: There are risks involved in all investment strategies and investors can and do lose capital. Trade at your own risk. Stocks, options and investing are risky and can result in considerable losses. None of the strategies, stocks or information discussed and presented are financial or trading advice or recommendations. Everything presented and discussed are the author’s own trade ideas and opinions which the author may or may not enter into. The author assumes no liability for topics, ideas, errors, omissions, content and external links and trades done or not done. The author may or may not enter the trades mentioned. Some positions in mentioned stocks may already be held or are being adjusted.

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