Big Dow Companies are continuing to come in on the weak side of earnings and investors are dumping shares. Investors are always fearful. I had a lot of capital released with October put options expiration so I have a lot of capital available to invest. Meanwhile I see no need to rush into Put Selling as there are lots of potential in stocks as investors continuing to move out their positions.
Goal of Put Selling
My goal of Put Selling is to sell puts on stocks at realistic levels. Despite what many analysts have said, many stocks were over-valued and are now returning to more realistic valuations. A lot of the reason so many of my naked puts kept expiring this year was because they were being sold at fair value while most investors were pushing stocks to over valued levels.
Stock and Option and Dividend Paying Stock Debacle
Dividend paying stocks in particular have been treated like guaranteed investment certificates with everyone talking about the yield. I am sure many investors inboxes are filled with the article “Bill Gross Says Buy Dividend Stocks”. I must have received 3000 of these emails by now and seens ads plastered all over the internet. Dividend paying stocks are not guaranteed products. These are risky assets and in no way should be looked at as a guaranteed product. Yet analysts have pushed thousands of clients into dividend paying stocks. Many of these clients have never held stocks but are simply seeking yield. Not much point in getting 4% and having the underlying security fall 8%.
Stock and Option – PepsiCo Stock
A good example is PepsiCo Stock. Twice since the market crash in 2008 – 2009, PepsiCo Stock has been over valued as it pushed beyond $70. But this stock is constantly over-valued at those levels. Earnings must improve and remain improved for prices to stay over $70. So it is pretty easy to know what to do as a put seller. Stay away from those levels.
The strength in the stock is between $60 and $65. Therefore that’s the main Put Selling areas I consider. When I say I sell puts against stocks that I would own I mean, “I sell puts on stocks I would own at put strikes I would own them at”.
After 40 years of investing I have found there is absolutely no need to chase ANY stock. I much prefer staying with Put Selling stocks at fair value which almost always is near or at support levels.
Looking For Put Selling Strikes at Fair Value
Watch The Charts
It is easy to do Put Selling by watching the charts. All stocks eventually will return to support levels if there is no support for higher prices. In other words when stocks run up because of investor “enthusiasm” they will always pull back on earnings. If earnings are solid, keep moving higher, then that stock will climb and establish a new support level. But without these strong earnings, the stock has no choice but to eventually move back to support zones. PepsiCo Stock disappointed with their earnings and is working its way back to support levels. This will allow me to once more earn much better premiums for my Put Selling in the stock. Seems simple doesn’t it.
Taking a moment to look at the 1 year to 5 year chart on a stock can give investors a lot of information and it can save them from making a lot of mistakes.