, Though overall our market posture is bearish, there is one bullish strategy i like to use for investing in down markets: selling cash covered puts on dividend paying stocks (with a history of dividend increases over the long term), with the intent of picking up the stock at a discount from current price. Electric utility Consol Edison $ED is a strong candidate. The stock itself meets our usual Chaikin Analytics checklist - Very Bullish, strong Industry and sector, superior relative strength, strong money flow, near oversold, price above rising Chaikin long and short term trend lines. Pus, the stock itself pays a dividend of better than 3.5%.
Rather than buying the stock at the open on Monday or when we get an Oversold Buy Signal, I could sell a put below the current market price and take advantage of inflated option prices in this volatile market. Selling the Out of the Money $77.50 put would pay me about $1.70 (2.2% of the share price at that strike. Not bad for a defensive utility stock!). The more aggressive trade would be the $80 strike, paying about $2.70 to hold the put until February expiration. I like that trade, because I want the stock the get "put" to me for its next dividend date, which should happen just after earnings on February 21st. The dividend will put an additional $.72 per share in my pocket
So, I can get paid $2.70 in option premium and a $.72 dividend just for agreeing to by the stock at $80 at February option expiration. I like that! There's some risk involved - holding through earnings, naked option exposure is a very precarious stock market, the stock price appreciating beyond $80 before it's put to me, etc. But the risks are less than buying and holding the stock outright, because there is close to $3.50 in downside protection should price decine. We'll go over the trade, manage the risk and put it on in paper-money coming up in Monday's video. Let's find out if selling puts in a precarious black-swan market works out. Another way we can use Chaikin Analytics to gain an investing edge in the markets!
--Mike
--Mike
RSS Feed