UYG - Selling PUTS - Nov Dec

Here, we discuss examples of selling PUTs. Take a look at the captured image from the spreadsheet that was used to perform the analysis. You can try something along these lines for various equities.

Analyse how one can generate an income for November / December for UYG in this example for various positions. For the conservative trader, the lower values sold are the best. For those who beleive that ultimately a stock will go up, they can use this to own the stock at a lower price.

Here is a brief tutorial on how selling PUTs works (this has been discussed previously on my blog; as well as several sources exist on the web).

---- Selling PUTs can be applied to either earn premium if Strike Price (SP) is not reached [Implying that the stock will not go down too much], or if a trader won't mind to buy a stock at a lower price. Of course, margin requirements have to be met with the brokerage firm so as to fulfill the obligation should a stock go down & hit the SP.

The obligation that a trader has is that if the stock closes at that strike price (SP) at expiration, the trader will buy the stock.

This is considered as a way to earn premium if it does not reach the SP, or a way to get a stock at a cheaper price because trader has pocketed the premium in advance.

If SP is not reached, trader keeps the premium. The premium received divided by the obligation to purchase is the ROI.

If SP is reached, then:

- The trader owns the stock at a lower price than SP, & can hold on to the stock or can turn around & sell a covered call against the holding.

- Or, if the trader does not want to own the stock & wants to bail out & not purchase the stock, then a reverse order needs to be executed to "buy back" (Buy to Close) the PUT & incur some loss/profit.

Position can be closed at a profit (if stock goes up, PUT loses value) or loss ( if stock goes down, PUT gains value) even prior to reaching the SP by simply buying back the PUTs
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PUTs - at near bottom amidst the turmoil

Perform an analysis of the following whereby if one sells PUTs for November or December, what is the ROI should the equity stay above the Strike price.

The calculations should indicate a return of 6% to 10% before commissions.

November - WNR ; Strike price = 5 , premium recd. = .45
November -UYG ; Strike price = 8 , premium recd. = .50
November -TIE ; Strike price = 7.5 , premium recd. = .75
December - UYG ; Strike price = 6 , premium recd. = .60


Of course, the investor will be assigned the stock should the equity drop & close at or below the strike price. In that event, either one can hold the position at a lower cost to sell it or sell a covered call against it in future. Other option include closing the position prior to expiration.

Look at the 52 week & 2 yr & 5 yr lows on the stocks, and perform the overall analysis.
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Still on board the wrecked ship ?

Well, the current turmoil hit all sectors & at a global level.

It is an interesting case study to see how we live in a global economy that even fraud & bad moves in one sector in a country can cause turmoil all over triggering such an overeaction.

Yes, "cash is king" right now for those who were in that position & now can start picking up in nibbles.

It also appears to be a 'once in a lifetime opportunity" to pick up financial ETFs.

The thought that always crosses the mind now is that you can fire the analysts (as always,.... though they do influence the ups-n-down in short run) ; throw the technicals out of the door (they have no meaning right now in this market), & perform your analysis on fundamentally strong companies & ETFs.

This oversold scenario after hitting quite hard has made UYG, SSO, DDM, UWM, UNG, EWH, EWZ as very attractive ETFs.

Along the same lines, equities such as C, GE, INTC, MSFT, TSO, PCU, FCX, FLR, KFT, TXN, MOT, ISRG, BA, MCK, STJ, SYK, .... (we can go on & on).

So analyse a few scenarios where you can buy some strong positions & then sell covered calls against them, for example UYG below 10 is great with a covered call for November yielding an execellent return or selling a PUT for November strike price of 9.

Alos, analyse simply buying LEAPS for strong companies, (for example Jan 2011 call for INTC strike of 15 )and then wait for some upward movements to sell a call against such positions.

Now of course, many though that we had hit the bottom couple months ago, & were wrong. but right now, it seems we may be there.

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