Last Week's Income Report: September 20th, 2021
After a surprisingly strong August — from a historical perspective, anyway — September has gotten off to a rocky start.
I’ve heard a couple of adjectives being used to describe the recent market action: “lackluster,” “deteriorating,” even “alarming.”
But the best word I can think of to describe the current market is “wobbly.” In other words, it can’t seem to make up its mind one way or the other.
Today’s sell-off on concerns over China’s indebted property sector resulted in the worst day for stocks in weeks. And you’ve probably heard the pundits saying the S&P 500 has not experienced a true correction, i.e., a pullback of 10% or more, in over a year.
So, are we due for one? Sure. I guess. Maybe. Who’s to say really, what the market is “due”?
If anyone on Earth could truly time the market, they’d have more money that Jeff Bezos.
Since it’s not possible to time the market, the next best thing is to be able to trade the market you’re in — whether up, down or undecided.
At Options Income Blueprint, we use a hybrid approach to navigate whatever Mr. Market throws at us. We think long term (like investors) but we trade short term (like traders).
That approach may sound like a contradiction, but I assure you it is not. I take a fundamental approach to stock picking, focusing on undervalued companies. This isn’t as simple as merely looking at a stock’s price-to-earnings (P/E) ratio, or even the price-to-earnings-growth (PEG) ratio.
That’s because a stock with a high P/E ratio can still be undervalued if Wall Street uses a different metric to value the stock. For instance, Netflix (NFLX) is valued on subscriber growth.
When I have homed in on an undervalued stock to trade, I then look to make sure it is a good candidate for our option-selling strategy. For this, the stock needs to have ample volatility, which translates into attractive option premiums, as well as adequate liquidity.
I generally focus on stocks that offer weekly options, which allow us to generate cash on a consistent basis.
Now, I will admit that September has gotten off to a slow start. August was a busy month, in which we closed 11 profitable trades in a row, generating $669 in cash.
We closed our first two winners of September last week.
Let’s take a closer look at each to help you better understand our strategy.
The first trade was on Marvell Technology (MRVL), which is one of my favorite semiconductor stocks.
Between September 2020 and January 2021, we traded MRVL successfully four times, pocketing $369 in cash using a mix of puts and covered calls
Our next trade on Marvell Technology came in mid-February. Admittedly, my timing was less than ideal, as MRVL was caught up in the broader tech sector sell-off. But we were able to use a recovery strategy to turn a potential 24% loss into a small profit.
With fears of prolonged chip shortages abating but the stock still throwing off large option premiums, I recommended another trade on MRVL during last week’s Options Income Blueprint Live Trading Session.
With the stock trading at $62.20, I recommend members sell the MRVL Sep Monthly (9/17) 61.50 Put for $0.46, or $46 per contract.
The stock bounced around midweek but closed Thursday nearly 2.8% above our put’s strike. However, shares opened weak on Friday, dipping down toward our strike. Rather than risk holding through expiration, I recommended members play it safe and close out the position.
We spent $0.21 to buy back the put. That may seem like a lot of cash to give back, but we still booked a profit of $0.25, or $25 per contract.
That represented a return of 0.4% over the $6,150 in capital we put up for the trade. And since we were in the position for four days, we earned 37% on an annualized basis.
Now, as it turned out, MRVL closed above our put’s strike, meaning the option would have expired worthless. But I have no regrets about closing early. The annualized rate of return was well above our target of 26% and, as they say, no one ever went broke taking a profit.
Our second profitable trade last week was on Walgreens Boots Alliance (WBA).
I see this pharmacy operator as a play on the vaccine trade. I believe COVID-19 will become endemic, rather than a pandemic, meaning there will be a continued need for booster shots and testing.
Prior to last week’s position, we had traded WBA three times so far in 2021, booking two winners and one small loser.
With the stock trading at $48.56 on Tuesday, we sold the WBA Sep Monthly (9/17) 48.50 Put for $0.48, or $48 per contract.
On Wednesday, the stock briefly dipped below our put’s strike before reversing higher. On Friday morning, the stock was trading nearly 2% above our put’s strike, and the put premium had dropped to a nickel.
I recommended a closeout to lock in profits, with members earning $0.43, or $43 per contract. That represented a 0.9% return over the $4,850 in capital we put up in four days, or 81% on an annualized basis.
So, despite a wobbly market, Options Income Blueprint members were able to close out two winners with rates of returns that exceeded our goals for the service (i.e., 0.5% a week, or 26% annualized). This just goes to show you that, with the right strategy, you can continue to bring in cash even when the market is unable to make up its mind.