Buy This Stock At A Double-Digit Discount Or Get Paid Not To

| September 30, 2016 | 0 Comments

options strategyUsing the same type of options trades as professional money managers, you can earn a 5% cash income in a month or buy this attractive stock at a double-digit discount.

On August 30th I recommended a trade to sell the September Whiting Petroleoum $7 puts for 30 cents to open. That trade worked out perfectly giving us a 5% return on our money in just one month, and now I want to give you a repeat treat for October.

We will use a variation on the widely utilized covered call strategy to generate near 5% returns with 70%+ probability of profit. This trade can be used to increase market returns and earn “income” from stocks and can be used to expiration every month.

Oil prices have firmed as discussions between OPEC and Russia about on cutting their production is a positive for pricing. Squeezing energy out of every rock with fracking has made America the global leader in production and knocked prices of crude oil and natural gas down significantly.

The extreme lows of $30 a barrel bounced only to stall this summer near the $50 level.

The heightened uncertainty has created a WIN-WIN situation for select energy companies to either buy stocks at a 10% discount or get paid not to.

Whiting Petroleum (NYSE: WLL), is a Denver, Colorado based firm that engages in Oil and Gas exploration. The Rocky Mountain area, including North Dakota, combined with Texas has reserves of 820 million barrels of Oil equivalent (MMBOE) that WLL can tap into.

Whiting Petroleum

Whiting Petroleum was an $80 stock when Crude traded at triple digit prices in 2014 but has fallen to under $10 per share.

WLL bounced from an extreme low of under $4 to $14 in June. Note that Whiting Petroleum closed below $7 only a handful of times since the beginning of March.

IT IS ALL ABOUT THE MATH

The option volatility above 75% level makes the option expensive in relative value compared to the market itself. Option selling strategies take advantage of the increased premiums.

The potential return on risk of 5% in less than a month is attractive with a $6.65 breakeven at the option expiration.

Buying at an 11% discount to the current price, if shares are assigned, is a way to position for a long-term recovery in a single digit stock… not a bad worst case scenario. Otherwise you to get paid 5% not to buy the shares.

The high implied volatility makes option selling strategies attractive as pure probability trades that utilize time decay acceleration. The October options have less than a month until expiration.

The tactic to buy at a lower price, or get paid not to, is used by money managers to buy stocks they WANT for long-term portfolio positioning. You can use other investors’ fear for your benefit by selling a CASH SECURED PUT to enter the stock at a major discount.

The fear and uncertainty can be used to get in another 11% lower for those who are, at worst, comfortable holding on to an inexpensive stock to wait for a potential recovery.

Portfolio Strategy

The straightforward Price Order to buy a stock at a lower level is common if it can be determined where it is comfortable to get in below current prices. Put in the trade at “X” and wait for the dip to enter.

Professional money managers have certain points at which they would buy a desirable stock but an option strategy lets them get in at discount or get paid not to.

Selling what is called a cash secured put has the same mathematical risk profile as a covered call and would assign the stock long at the option strike price. The true entry basis is actually even lower with the subtraction of the premium.

With the Put sale there is an obligation to buy at the strike price if it is assigned.

However, if the stock is not below the strike at expiration the premium received is all profit.  Get in the stock at a discount or get paid not to…

Whiting Petroleum

Trade Setup: Sell the WLL October $7.00 Puts to open at $0.35 or better. The cash secured Put sale would assign long shares at $6.65 if it is put to you costing $665 per option that was sold.

The combination of time decay and 70% probability of WLL finishing above the $6.65 break even make the option sale attractive with just a month until expiration.

If WLL stock does move lower, buy the shares for 11% cheaper than the current share price. In the event that shares are assigned at $6.65 basis, a November covered call can be sold against the stock to lower the cost basis again when you own it.

Otherwise, you get paid not to… and get a 5% return in less than a month.

This cash secured put selling strategy profits if WLL rises, stays steady or even falls, up to an 11% drop.

Options trades like the one above and the kind I specialize in are a great way to boost the returns in your brokerage account when you don’t want to tie up a lot of cash and want to minimize downside risk.

Another way to pull in consistent cash is by putting your money in places where you know you’ll get a decent return, like the specialty bank paying 7% that my colleague Tim Plaehn recently shared. He just released a new video about this great income opportunity. Just click the link below to find out how to start earning 7% on your money.

Click here to start earning 7% a year. 

IT IS ALL ABOUT THE MATH

 

Note: The author of this article is Alan Knuckman.

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Category: Options Trading Strategy

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The author of this article is a contributor to Investors Alley.