“It is not the strongest of the species that survive, nor the most intelligent, but the ones most responsive to change.”
-- Charles Darwin, English Naturalist.
For those stocks that I just want to buy, hold and collect the dividends, I want to be able to get in at the best possible price. I look at the charts for reversal patterns where the stock is oversold and about to turn up. The best way of doing that is by looking at the momentum indicators and oscillators and seeing the momentum shifts in investor sentiment. I also look at the longer time frame chart (weekly chart) for support levels and identify the level that I think is the best possible price I can get. I then go back and look at the daily chart to determine the specific reversal patterns I like to use.
If both the daily and the weekly charts are bottoming out and beginning to turn up, this is the best possible time for me to maximize my buying. This is the point I want to accumulate as much stock as I can afford. Buying at this point doesn’t affect the dividend amount paid per share but it does affect the number of shares I am able to buy and therefore increases the income paid to me at the next dividend payment date. This could be considered my “buy low, hold, and live off dividends” strategy. If I got into my position by selling puts in the first place then the strategy is even that much better!
I’ve used this strategy over and over again to build up a portfolio of stocks that pay nice quarterly dividends. But stocks reverse on the top side also. If I own stocks that I want to continue to hold simply for the pleasure of receiving those nice quarterly dividend checks, I sell covered calls off those positions as I see the stocks begin to roll over and reverse. Covered calls are a great strategy for increasing your income above and beyond receiving simply that quarterly dividend. And since options are usually sold with monthly expirations they provide a nice monthly income supplement to those quarterly dividends. I guess this could be called my “sell naked put, buy stock low, hold, live off dividends, sell covered calls for additional income” strategy.
For the most part, this is how I run my portfolio. This strategy is a fairly simple and straight forward plan. I do, however, have a very small portion set aside for the sole purpose of selling covered options. I do this for the purpose of generating income to finance that larger portion discussed above. It is here that I use my knowledge of stock reversals to sell covered puts and calls. This strategy is based on finding high beta stocks that show definite patterns of reversals. This strategy also requires the extensive use of momentum indicators and oscillators to determine when stocks are either overbought or oversold.
My strategy is to sell covered puts on stocks that appear to be oversold and turning up. I generally sell puts at-the-money or in-the-money with the expectation that the stock will turn up and the put will expire worthless. I then simply keep the premium or fee and look for another candidate. Occasionally I misgauge the amount the stock will move up after the reversal and I end up having the stock put to me. In those cases I sell calls at the same or slightly higher strike price so I can collect the largest premium possible as I exit the stock. Once back in cash, I look for another put candidate.
This portion of my account is relatively small but I like to turn it over quickly and continuously to keep a constant flow of income. This is the fuel that feeds the larger portion of my account. In order to do this, I prefer to sell options that expire weekly. I like being able to go completely to cash at the end of the week and then having the weekend to review the charts.
I guess this would be my “sell puts on Monday and they expire worthless on Friday” strategy. My target return for this strategy is 1% per week. That’s not always possible but it’s the goal I use in comparing the returns on various options. For instance, on a $50 stock option ($5,000) I would like to make $.50 ($50) for the week. Doesn’t seem like much but percentage wise, it is. A 1% gain per week is a 52% gain per year. And while I can’t do that on a consistent basis, if I can get even half that amount it’s still outstanding by any measure. But as I mentioned above this is only a very small portion of my account because this is an extremely risky strategy and the possibility of total loss of equity is always there.
Remember to always do your homework before you invest. Always invest with a plan and always have an exit strategy.
Trade for today, invest for the future.