T Stock (AT&T) has been in my online Put Selling portfolio since January 2011 but I have been Put Selling and trading T Stock since December 2002 when the stock was at $27.00. Last year I earned just $3606.25 in T Stock through Put Selling as much of the year I felt T Stock was overvalued and I would not do Put Selling above $28. The return last year was 13.3% which isn’t bad considering the small amount of capital that was in use during most of the year and my stopping Put Selling for 6 months in 2011.
This year though T Stock has been a terrific stock, earning $14574. The return has been 29% in 2012. On Friday I bought and closed my December $32 naked puts which I had sold on Oct 15 2012. Meanwhile I am now holding 10 naked puts for December 22 at $33 and 5 naked puts for January also at $32.
Stopping Put Selling When T Stock Is Overvalued
This year, once T Stock climbed over $34.00 I stopped Put Selling. The highest valuation I have been willing to do Put Selling against was $34.00. This has kept me away from getting caught when T Stock recently pulled back. With so many stocks to choose from, when a stock becomes overvalued in my opinion, I stop Put Selling and move to other stocks. I simply wait for the stock to fall back and then commence Put Selling again.
There are many ways to determine if a stock is overvalued but I prefer a very simple chart review such as below.
T Stock 5 Year Chart
If we bring up the 5 year chart, we can see at a glance that the $32 level has some support but the $30 has a lot more. We can also see that T stock has not been able to establish a higher trading range above $32.00 that has lasted for more than a few months. Therefore when the stock gets above $32, it has been better to move no higher than $34 for Put Selling and at $34, make sure the stock is in an uptrend when selling even that strike.
Put Selling Means Having A Plan
By selling the $32 and $33 naked put strikes I can easily roll these out 3 to 6 months and down to $31 and $30 if needed.
Since that is my strategy, I have confidence in put selling the $32 and $33 levels in this correction.
The second part of the strategy is for me to buy back the naked puts when the put premiums have eroded sufficiently to provide a very good profit. Then I can re-use the capital to sell additional puts in any weakness or dip in the stock.
For example on November 23 I bought back and closed my December $32 naked puts for 9 cents which I had originally sold for 36 cents back in October.
Watching For Severe Corrections
When Put Selling, it is important to keep an eye out for severe corrections. T Stock was up at $38.43 on Oct 4 and in just over a month it had fallen 14.8%. This brought the stock back to near the $32 valuation which has a fair level of support which you can see in the 5 year chart above. Each decline in November I sold naked puts against T Stock and then this rise in the stock I have bought back some of the earlier naked puts to free up capital for further Put Selling when T Stock falls back again.
Knowing When T Stock Will Bounce
Put Selling has been easy this year thanks to watching the Lower Bollinger Band.Throughout this downturn in T Stock, it has repeatedly bounced off the Lower Bollinger Band and then after a few days rally, it has fallen to another lower low, creating the pattern you see below of lower highs and lower lows.
On Friday, T Stock climbed back to $34.36 almost reaching the previous high. If T Stock pulls back from here I believe this time is could break through $32.
The Put Selling Plan For The Next Downturn
I will close my December $33 naked puts quickly on any pull back but if I am unable to buy them back for a profit, should perhaps the stock fall quickly next week, I will buy back my December $33 naked puts and roll them out further and down to $31. I may have to add additional capital to the trade through selling more puts than I buy back when I roll lower, to make the roll down profitable. I have no problem placing more capital at risk in T Stock. I believe it is good value below $32.00 unlike last year when I felt it was good value below $29.
Like all stocks, until T Stock breaks the pattern of lower highs and lower lows, it is best to always buy back naked puts if there is a good profit and then wait for the next opportunity to sell naked puts when the stock pulls back or dips lower again.
Once this pattern changes to higher highs and higher lows, then I can comfortably go back to Put Selling at the money and hold the naked puts into options expiry.
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