Pandemic Stocks = Huge Options Premiums
June 12th, 2020
It was a wild ride for the markets this week.
On Monday, the S&P 500 turned positive for the year, erasing a drop that had taken the index down more than 30% by March. On Tuesday, the Nasdaq cracked 10,000 for the first time in history, closing above that level on Wednesday.
Then came Thursday, when stocks suffered their worst day since March, with the Dow Jones Industrial Average cratering more than 1,800 points, as we saw a spike in coronavirus infections. And while the market started out strong on Friday, the rally fizzled midday.
The bright side of the extreme market volatility we’re seeing is that it has translated into huge option premiums, which is great for options sellers like us.
After a slew of profitable closeouts last week — four to be exact for a total of $163 in cash — we didn’t close out any positions this week.
We did, however, enter new positions on two of our favorite names to trade:
- Bank of America (BAC), which we’ve traded successfully five times already this year for a total of $195 in income; and
- Gilead Sciences (GILD), which we’ve traded profitably three times in 2020 for $186 in income.
In Tuesday’s Options Income Blueprint Live Trading and Strategy Session, we sold a BAC put for $24. While that may not sound like a lot of cash, consider that the following:
I typically aim for a cash return of at least 0.5% a week per trade. If you can do that 52 times a year, you’re looking at an annualized rate of return of 26%, which is certainly nothing to sneeze at.
For the BAC trade, we sold the BAC Jun Week Two (6/12) 27 Put, meaning this trade tied up just $2,700 in cash — the amount that would have been needed to purchase the shares at the put’s strike price if we happened to be assigned. So, that $24 in income represented a potential 0.9% return over the cash we were putting up — almost double my stated goal — in just four days.
We also sold a GILD Jun Week Two (6/12) 75 Put in Tuesday’s session, picking up $68. That means this trade also offered a potential return of 0.9% over the $7,500 in capital we tied up.
Things were looking pretty good for these trades until Thursday’s market rout. Sharp declines in both stocks forced us to roll out one week to buy some time for shares to recover. I say “buy” some time, but we actually got paid to roll, collecting additional income that increased our cash in hand for each trade.
In fact, we rolled all of our positions set to expire this week (some more than once) bringing in a ton of cash: