Doubling Down on Puts and Dividends

Doubling Down on Puts and Dividends

     After much consideration I've decided to shelf Credit Spreads as the Options strategy for the EAF portfolio. I've decided instead to return to the more conservative strategy of selling Puts with the new added benefit of selling Puts on Equity.

Credit Spreads: Too Much Risk

     I was very excited about Credit Spreads when I first researched them a few months ago. They seemed like a great way to generate income while not even owning the stocks. Credit Spreads can be sold both up and down equally which means that no matter the market there can be a winning spread. I made some really good choices early on and pulled in great numbers. I use www.stockta.com to find stocks with strong Overall and Short Term indicators while paying attention to the overall indicators for the market.

     Now I realize that this is where I went wrong. I'm a very large supporter of the idea that timing the market (on an individual basis) is a losing game. A much better strategy is investing in those blue chip Dividend Champion stocks that have been successful for a very long time and more likely than not, will continue to be in the future. Buy and Hold is a time tested, successful strategy. Make less movements to minimize losses and you will see consistent gains. With the Credit Spreads I was breaking one of my own rules and timing the market. I was expecting to net over 20% a year. That number is ludicrous and I knew that but avarice got the better of me and I fell into the market timing trap. I lost 17% in a month. I'd rather make 1% a year with zero chance for losses like that than having a 50% chance of either making 17% or losing it. So Credit Spreads are done for now in the EAF portfolio. Perhaps at a later date I will do some additional research and try them again but for now I'm going to attempt to recover some of the losses from the past two months although I doubt that I will be covering them before the end of the year.

Previously in the EAF Portfolio....

     Prior to Credit Spreads and this blog I had been using a very simple approach to Options. I had enough funds to purchase 100 shares of a Dividend Champion stock. Instead I would sell a Put on that stock at the nearest strike price but still out of the money. I didn't use any actual indicators or have any reason to believe that the stock would end out of the money other than looking at it's 3 month and year long chart. I did this quite a few times with success until I ended up with Lowes stock.

     I invest in the Dividend Champion stocks anyway as I see them as a great investment vehicle capable of slow but consistent growth so when my Put was exercised on Lowes I didn't really have a care in the world. After that Lowes had a bit of a plunge and it took a year to recover. During that year all of my Options money was tied up in the stock so I wasn't able to place a single trade until that regained its value. One it recovered and even gained a little I promptly sold it for another small profit and started placing Options trades again.

     The point here is that even though my Option went against me and I ended up with the stock for over a year, it was a stock that I would like to own anyway and at the end I still posted a profit instead of a loss. My Credit Spreads that have gone bad have been straight out losses, nothing to show. This past month's Credit Spreads were even thinned out to generate 1-2% instead of the 5% I was getting in an attempt to make them safer. Against all indicators, news, thoughts, and other mystic readings they went bad anyway. I was posting 10% profit from my Put strategy with much lower risk of actual loss so the Credit Spreads now become (in hindsight) a bad idea for my investing style.

Puts on Dividend Champions: Now with Equity!

     So on to the new (old) strategy. I will be selecting the stock from the Dividend Champions that has the strongest upward indicators according to StockTA. I will sell a Put for as many contracts as I can afford at the nearest Strike Price but still out of the money. If the Put goes the wrong way on me I will end up owning a premier blue chip stock with upward indicators.

     There is an actual new part to this strategy and that is trading on Equity. While getting my trading account approved for Credit Spreads I was also approved for trading Options on Equity. So now instead of having to have the available funds for the Put I can instead buy and hold a Dividend stock and sell the Put based on its value. This should net the triple earning of rising stock prices, dividends, and Option sales. Of course we aren't talking huge numbers but if I can pull 10% from this for the year then I will be happy.

     A word of caution, owning stock that is underlying my Put will expose me to an additional risk that just holding the cash would not. There is a chance that the stock losses value, at which point I may have to lose money on the stock to be able to fund an exercised Put. Personally I don't think that this is much of a concern. I own multiple stocks and all of the ones that I have held for any appreciable amount of time are up, some by over 50%. This means that I have stocks sitting that I can use to fund an exercised Put and not lose any money on the equity. The hope is that most of the Puts expire and therefore I won't have to cash out stock often so I should have plenty of stock that I can sell for a profit and use to fund exercised Puts.