$753 Cash in our Pockets on 3 Trades This Week
January 15th, 2021
The market’s momentum waned this week, with the S&P 500 finishing down 1.5%.
This happened in spite of President-elect Joe Biden revealing his $1.9 trillion pandemic relief plan and Federal Reserve Chairman Jerome Powell saying the central bank had no plans to tighten monetary policy or pare back its bond-buying program.
Looks like a buy-the-rumor, sell-the-news type deal to me!
Investors instead seemed to focus on data points highlighting the coronavirus pandemic’s continued drag on the economy. These included the highest initial unemployment claims since August and worse-than-expected December retail sales.
With economic data worsening and COVID-19 infection rates rising, it’s possible stocks may remain stalled. Plus, we have the threat of violence in Washington, D.C., and state capitals, with next week’s presidential inauguration overhanging the market.
Whatever happens, we’ll continue to trade through it, as we always do.
We closed three profitable put positions in Options Income Blueprint this week:
Traders who sold just one contract of each could have earned $251 in income.
The DHI trade was a monthly put we entered at the beginning of January. It worked out perfectly and we were able to close a few days early for an excellent rate of return.
The CHWY and GM trades were rolled positions despite only being open for three days. That’s because we laddered them up –i.e., we rolled them to higher strikes simply to generate more income.
To illustrate how this works, let’s run through the Chewy trade.
First, a little background. Chewy is one of my absolute favorite income stocks. I was a big fan of the online pet retailer as a pure growth play before the pandemic. But as the world locked down, we saw an acceleration in the shift away from physical stores to digital shopping. We also saw a rise in pet adoption rates. Both of these trends bode very well for Chewy, which has become a popular pandemic play.
Last year, we successfully traded the stock eight times in Options Income Blueprint, earning a potential $674 in income.
On Tuesday, we entered our first trade on the stock in 2021. With shares at $103.65, I recommended members sell a CHWY Jan Monthly (1/15) 97.50 Put for $0.80, or $80 per contract.
On Wednesday, the stock shot up 8% after a Credit Suisse analyst raised their price target to $121 per share. We could have closed the position then and there by buying back the 97.50 put for $0.09. We also could have held on through expiration in hopes that the put would expire worthless.
But there was actually a third option — to ladder up the position to bring in more income. And that is precisely what I recommended members do.
We bought back the original put and sold another put with a higher strike but the same expiration date — the CHWY Jan Monthly (1/15) 105 Put to be exact. This brought in an additional $29 in income per contract, bringing our total cash in hand to $109.
On Thursday, CHWY was again moving higher, as pet supply retailer Petco Health and Wellness (WOOF) made a strong market debut.
With a good deal of cash on the table, I recommended we pocket profits. We spent $0.10 to close the position, earning $0.99, or $99 per contract. That worked out to a 0.9% return in just three days, or 115% on an annualized basis.
Laddering up positions is an excellent strategy for option sellers and one I suspect we’ll be making a lot of use of this year.