Stock Market Dips Present Option Trading Opportunities
Selling put options is a great way to generate income and solid annualized returns by taking less risk than owning the same amount of common stock long. When I look for these trades I target earning 2% or more for every 30 days of expiration time.
Selling a put option is a strategy where you are slightly bullish on a stock and this reduces your risk by being able to name the price (called the strike price) you are willing to pay for the company. This contract is valid for a specific amount of time called the expiration date.
These terms are set by you and for agreeing you are paid upfront for the potential obligation to buy 100 shares of stock for every put sold. I typically look at options expiration dates between two weeks and two months.
Progressive (PGR)
This $65 billion insurance company is well off its highs due to short term earnings. The companies earnings declined due to rising interest rates causing the company to market to market its bond portfolio and realize an earnings statement loss. This should be a short term problem as interest rates stabilize and the company reinvests in higher interest paying bonds.
The companies marketing and innovative care insurance products is still growing revenue via insurance premium sales (up 12% in the last year). Analysts expect earnings per share to rise rapidly over the next two years from $3.00 per share to $6.30 for 2023.
Share price is fluctuating around the 50 day moving average with a rising 200 DMA providing further stock price support. The MACD is in oversold territory and is starting to rise which should support a stock price bounce. This volatility plus positive technical analysis leads to a great short term option trade opportunity by selling a put 1 month out.
Sell to open June 17, 2022 $105 puts on Progressive (PGR) for $1.60 using a limit order. You are paid 1.5% upfront for agreeing to buy shares at $105 each.
At expiration if shares are above $105: put sellers will keep the $1.60 free and clear for a 19% annualized return.
At expiration if shares are below $105: you will buy 100 shares of stock for every put sold at $105. You can then look to generate more cash by selling covered calls.
For protection use a 15% stop loss on your adjusted cost basis ($105 - $1.60 = $103.4 adjusted cost basis) at $87.89.
Disclosure: I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article. The information provided should NOT be considered advice. The topics discussed are risky and have the potential to lose a substantial amount. I am not an investment professional and therefore do not offer individual financial advice. Please do your own research before investing.
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