Kopin Tan wrote an interesting article in this weekend’s Barron’s starting on page M2. A few of the key points he hit are:
– “The Dow has climbed in 19 of the last 21 sessions – one of the most enduring streaks since 1929.” My first thought was that has to mean that we are due for a hard correction soon. Then he continued…
– “Institutional market confidence stands a the highest level since 1990.” and…
– “So far, companies’ first quarter profits have generally come in above analysts’ lowball estimates.”
What? I thought we were doomed, but it was just that the estimates were too low? What’s a small investor to do? The same as always – give careful thought to any trade and be ready for a pullback. One of the takeaways I got from this article was “…institutional willingness -for now- to buy the dips helps limit the downside risk.”
This market could be the ideal setting to consider SELLING puts. A lot of institutions are starting to try to cover their tales in case of a fall and are BUYING puts. Buying options is not for me. I’d rather sell out-of-the-money puts and pocket the premiums. Selling puts OTM gives that little cushion that can be all that’s needed in a short pullback to make a fat return. Don’t get me wrong, risk is still there, but selling OTM reduces the risk. Even if a stock is assigned to you it’s at a discounted price. Possibly at a price where it might be bottoming out and that sets you up for a larger return on the bounce.
Two of the stocks mentioned (one by Tan and the latter by Christopher Williams in the article below it) that I found interesting are Valero Energy (VLO) and Tetra Tech (TTEK). Both stocks have been on a good run for a while and seem to have legs left on them. Looking at the stock charts, I think both will pull back some before taking off again. This does creates positives for the options seller:
1. It increases fear in the investors already long and raises the premium prices higher than they should be.
2. If a stock pulls back some of the risk is left behind and the fall the put writer might feel is lessened.
VLO closed on Friday at 71.21. Looking at the YTD chart I see a trend line that could offer support at 65 and another, shorter trend above that around 66. I put a limit in for the June 67.50 put for $2.25. The current ask for that strike is $1.45.
TTEK closed on Friday at 21.06 and has had a recent breakout that makes the chart interesting. I don’t think TTEK will fall all of the way back down to its previous trend line of lows. I think TTEK might fall to use what was an upper trend line of its highs as a new floor. If not that line, then its old high at 19.00 could provide support. Either way, TTEK could pull back more than $1 from where it is now down to 19.00 – 19.50. I put limit to sell four puts for June 20 at 1.00. The current ask for that strike is .55. The puts will sell for more than that if it goes all of the way down to 19.00, maybe even if it goes to 19.50 with the increased fear, but at 1.00 I’ll come to options expiration at even money and will have the choice of if I want to let it ride and write covered calls or take any profit I might have. I think the drop to 19.00, if it goes that low, will be short lived and the premiums will be straight profit.