Occasionally I run across a company that presents a lot of opportunities for my style of investing. Granted you won't find a dividend here but what you do find is a defined channel and the ability to sell weekly options. Obviously I wish these shares were priced in the $30s or $40s, but you often have to take what you can find in the markets. I think these shares are about to bounce off the lower channel line and head back higher toward the $140s.
So what's my strategy for these shares? The natural choice would be to swing trade between the channel lines but that would require volume and would be pretty expensive. A complementary strategy would be sell options in lieu of the swing trade. There's benefits and costs associated with both strategies are different and before investors decided which strategy to chose, they need to understand them both. It's this understanding that is the basis of an exit strategy.
The Swing Trade. This is the best choice. It's simple and it's easy. But it's also expensive. It doesn't take a lot of thinking and the stress level is somewhat lower. Simply buy as close to the lower channel and line and wait for the shares to rise up to the upper channel line. Since there's no time constraints, a trader simply has to sit back, monitor the situation, and wait for the shares to rise and put in a sell order near the upper channel line. Seems easy and it is, as long as everything goes well. The channel lines are the key. Especially the lower one. And that's why you have to monitor the trade. If the lower channel line doesn't hold, a quick decision needs to be made that sells the position until a trader can understand what's happening. Holding shares that are falling is never a good idea so the quicker the situation is recognized, the sooner this exit strategy is executed. If it later turns back higher investors can always re-enter the trade later.
The Option Trade. The key to this strategy, like most option strategies, is the advantage of leverage. The money to be made is mostly in the premium and the directions movement of the shares while the downside is time limit if the trade goes against the trader. There just needs to be better timing of the trade. With channel lines the obvious trade is selling puts when the price is sitting on the lower channel and selling calls when the price is nearing the upper channel. Similar to the swing trade, this strategy needs to be monitored closely when the price is near the channel lines but it also has to be monitored closely as the option approaches the expiration date. As the option approaches its end date, the premium shrinks quickly and the option trades in sync with the underlying stock so there's less to be gained from the option itself and more to be gained from the underlying stock. That loss of premium may make the difference on whether the option is sold or kept. The trade become more and more stressful as it approaches expiration and it's something to take into account trading options. But if executed correctly and the underlying stock move in the right direction, it can be a very lucrative strategy.
My Strategy Going Forward. Since I'm comfortable trading options and well capable of executing an exit strategy if things go wrong, I expect to execute the option trade. For me the swing trade would cost $11,360 for every round. If the only course of action for some traders is to sell cash secured puts at the lower channel, then this strategy would require that $11,360 be available in case the trade went south. But with a margin account and a little discipline, naked puts and calls can be sold and the leverage becomes obvious. This is, however, a risky trade and shouldn't be performed unless the investor understands all the things that can go wrong. But for me the leverage is an advantage and I'll use the income to actually buy shares of the company. Overtime I'll eventually own shares of this company that was bought with money earned in the market rather than using my own funds. And with those shares I can easily implement a swing strategy.
The Option Trade. The key to this strategy, like most option strategies, is the advantage of leverage. The money to be made is mostly in the premium and the directions movement of the shares while the downside is time limit if the trade goes against the trader. There just needs to be better timing of the trade. With channel lines the obvious trade is selling puts when the price is sitting on the lower channel and selling calls when the price is nearing the upper channel. Similar to the swing trade, this strategy needs to be monitored closely when the price is near the channel lines but it also has to be monitored closely as the option approaches the expiration date. As the option approaches its end date, the premium shrinks quickly and the option trades in sync with the underlying stock so there's less to be gained from the option itself and more to be gained from the underlying stock. That loss of premium may make the difference on whether the option is sold or kept. The trade become more and more stressful as it approaches expiration and it's something to take into account trading options. But if executed correctly and the underlying stock move in the right direction, it can be a very lucrative strategy.
My Strategy Going Forward. Since I'm comfortable trading options and well capable of executing an exit strategy if things go wrong, I expect to execute the option trade. For me the swing trade would cost $11,360 for every round. If the only course of action for some traders is to sell cash secured puts at the lower channel, then this strategy would require that $11,360 be available in case the trade went south. But with a margin account and a little discipline, naked puts and calls can be sold and the leverage becomes obvious. This is, however, a risky trade and shouldn't be performed unless the investor understands all the things that can go wrong. But for me the leverage is an advantage and I'll use the income to actually buy shares of the company. Overtime I'll eventually own shares of this company that was bought with money earned in the market rather than using my own funds. And with those shares I can easily implement a swing strategy.
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