As investors we sometimes try to wrap our heads around alternative, complex strategies and lose focus on our individual comfort zone. Just because a specified trade or strategy works well for one person doesn't mean we should try to employ it into our strategy. This always circles back to a Steve Jobs quote, which has resonated with me:
That's been one of my mantras - focus and simplicity. Simple can be harder than complex: You have to work hard to get your thinking clean to make it simple. But it's worth it in the end because once you get there, you can move mountains.
- Steve Jobs
As I noted in my previous article, I plan on structuring a portfolio that can stand the test of time and provide substantial income - a dividend growth strategy with an emphasis on value. As the market has been on a tear over the past several months, a lot of people are hoarding cash awaiting their desired entry points. Instead of sitting and waiting for a market correction why not put that cash to work for you. Heck, if we can't get into a stock at our desired entry point, we may as well be paid to wait. Selling puts is a simple strategy that pays us a premium to potentially take a position at our desired price. I generally only use this strategy on stocks that I am extremely bullish on and wouldn't mind holding long term. Let's take a look at Intel (INTC) for example, one of the 10 starter stocks from my previous article.
I recently initiated a position in Intel and wouldn't mind owning more around $28. After the Q1 EPS beat by $0.03 and year-over-year revenue was flat, (at the time of writing) Intel has had a fair sell-off of approximately 3% after hours. This is an ideal time to sell a put as we can recognize an increase in premiums for the price we've already decided we wouldn't mind owning shares. Again, this strategy should be employed with stocks one is bullish on and have a longer-term horizon. So for the trade:
- Sell Intel June $28 puts offering $0.91 premium
This trade provides us with $91 per contract (excluding commissions) and also gives us a chance to get into the stock at our desired price. Oh and this measly $91 is still a 3.25% return on cash that would otherwise be waiting for a market correction. Let's say you're able to make a trade similar to this every other month, so 6 times a year. That's nearly a 20% return on cash (assuming we're not put shares) that otherwise may be earning you 1% a year in a savings account, if you're lucky.
This is a fairly simple strategy that I've employed to back into positions I anticipate holding long term. While it's fairly simple, it may not be in everyone's comfort zone, at which point I re-emphasize the Steve Jobs quote above. I personally don't integrate complex options strategies into my trading, because I'm not comfortable integrating them, it's as simple as that. Go with what works for you. Simplicity is relative to comfort and we're not all comfortable doing the same things. Find your comfort zone and make your individual success as simple as possible. Focus on Simplicity
Disclosure: I am long INTC.