Put selling is always a strategy of earning small rewards while timing the best moment to be selling puts. With the market direction now down 10%, stocks could be setting up for a rebound rally which could last more than a few days. If the rally should gain momentum stocks could push higher and faster than a lot of investors are ready for making put selling at this level on the S&P a profit opportunity. To that end I did some put selling today.
While my market timing indicators from June 4 show that pressure remains on stocks, many stocks have reached compelling valuations for those of us who enjoy put selling as an investment strategy.
While the slow and fast stochastics from June 4 after the close show that selling may resume, the see-saw action today in the markets indicates that we may have hit a point where stocks can rally higher from or at least not fall more than a percent or two.
With June options expiry just two and a half weeks away there are various stocks with excellent premiums which for investors like myself who would own these stocks if assigned, make risking capital worthwhile.
With the S&P 500 down 10% I would expect at this stage no more than a further 2% decline before a rally ensues. The VIX Index which I discussed in the June 4 market timing column indicates a high level of complacency in the market. This complacency may come back to bite investors but by not using all your cash to risk put selling some stocks, this would leave open the possibilities of rescuing trades profitably should the put selling not work favorably.
Put Selling In A Correction
In a market correction put selling is more difficult particularly for those who do not wish to be assigned shares. My strategy for put selling in a correction has always been to not risk large amounts of capital. Basically I wait for a 10% correction which my past historic charts show that by the time a 10% correction has occurred most often the selling slows for a few days to weeks and allows for me to go back to put selling for a short time.
Put Selling And Capital Percentage In Use
The put selling strategy at 10% in a correction is fairly simple. I use only 30% of the capital I would normally commit. Then I watch the market timing indicators to see if the market can rally from the 10% correction. If it does I can commit more capital, up to 50% as long as the rally continues.When it stops I close any naked puts that are too near assignment.
Put Selling Smaller Contract Sizes
Where in the past I would sell 10 naked puts, I now sell 5. This leave me with the opportunity to sell more naked puts should the market rise after a 10% correction. I never sell all my naked puts at one time after a 10% correction as the market could easily not rally but fall another 2% or so. This would push up option premiums further, allowing my put selling to be even more profitable.
When put selling in a correction the importance of having a strategy to rescue your naked puts should the market continue lower, is essential unless you do not mind being assigned shares in the underlying stock. You should have your rescue strategy in place before entering put selling trades.
Stocks I Am Consider For Put Selling
In this most recent correction the stocks I have considering for put selling are those that could have significant moves back up in a short rally.
Here are some of the positions I placed today:
Put Selling At 10% Correction Level On the S&P 500
Microsoft Stock where today I sold the June 27 for .18 cents
Nucor Stock where I am sitting with an offer to sell at .38 cents
Bank of Montreal Stock on the Toronto Stock Exchange where I sold some puts for June $52 today for .40 cents and I have offers in for .55 cents
Royal Bank Stock on the Toronto Stock Exchange where I sold some puts for June $48 for .65 cents today
Intel Stock where I sold naked puts on the June $24 for .23 cents today
Yum Stock where I sold naked puts on the June $60 for .80 cents today
Put Selling At 10% of A Correction Summary
All of the above are small contract groups which I can rescue easily through a variety of strategies. By not committing a lot of capital after the market has fallen 10%, there is a good chance that from here for a few days these trades will begin to lose premium and the market could rise from here. If the market does rise these put premiums earned through put selling today, will rapidly lose their value and I should be able to close them profitably.