Over time my trading strategy evolved. I went from chasing high yield to chasing high options premiums and now I realized that it is all futile. And dangerous.
So, I am now in a position that I am OK collecting a few dollars every month or week as these small payouts will compound and grow large. It is more important for me now to preserve my account and keep trading.
Before, when trying to sell options I thought selling options to collect $15 dollars premium is not worth it. So I was chasing big premiums such as $400 dollars. Today, I am sitting on a few trades stuck in them, trying to roll them to get out as a winner, or close them and take huge losses.
I was thinking that selling options against good quality stocks and collecting only $15 dollars per trade is worthless so I took high flying stocks such as US steel (X), or TECK, or LULU, MNK (fortunately, I am out of this one), or WYNN… All bit me hard for being greedy.
On the other hand all my small premium trades against good quality stocks such as JNJ, T, BAC, BA, O, etc. are all performing well and keep bringing small dollars every week or month.
Just in the first week of December 2017 I could make over $700 dollars in premiums trading these “little”, lazy stocks! And I keep trading in lieu of sitting on my hands and waiting for those bad stocks to come along so I can get out of those trades.
I do not know if this is something you need to learn the hard way because we do not listen the experienced traders or it is just me stubbornly trying to prove to everyone that I can do better.
Many times in the last year or two, even in this extremely bull market when everyone makes money, I still had a few occasions where the stock position gave a hard time. It could be a hard time to upside or downside. And I realized that it was the high flying stocks which were the culprits. Never positions against good Dividend blue chips.
And then I came to realization that I needed to change my strategy a bit. Modify it. Trade safely and not chase premiums at all cost as sometimes the “all cost” can be very costly.
I therefore modified my strategy to trade put options against dividend growth stock – dividend aristocrats (or Champions). I allow for a few exceptions using dividend contenders or Challengers, but mostly stay with good high quality stocks even though the premiums collected will be lower.
· My 2018 Options Strategy
My stock selection process and trading strategy is now as follows:
1) Choose 30 shares from the Dividend Champions list.
2) Select 30 shares from the list which offer options, weekly, or monthly, and have enough put and call strikes available.
3) Select stocks which offer min. $15 premium on as short day to expiration (DTE) as possible (ideally 7 – 10 days or more)
4) Check stock list regularly (ideally monthly) and when any stock is removed from the list, remove the stock from watch list, sell all positions and stop trading options against the stock.
5) Sell puts against these stocks.
6) Roll put options to roll assignment as much as possible, if rolling is not feasible, accept assignment.
7) Once assigned, keep the stock, collect dividends.
8) Start selling covered calls.
9) Roll calls up (or down) as much as possible to avoid assignment.
10) When rolling is not feasible or possible, accept assignment and sell the stock.
11) Rinse and repeat.
Use the above process to build a strong dividend stocks portfolio with these rules:
12) Use 50% of options proceeds (income) to buy dividend champions stocks either directly (if not enough cash yet available) or via in the money puts and assignment.
13) If the monthly income from options is higher than $1,000 dollars, use 50% and buy shares of dividend champions which are in a correction mode.
14) If the monthly income from options is less than $1,000 dollars, use 50% of 6 months combined income to purchase dividend champions. In this case, purchase stocks in August for January – July combined income; and in January for August – December combined income.
15) Reinvest dividends either via DRIP or direct reinvestment.
16) Sell covered calls against these dividends only when a CC can have strike above the cost basis so if the stock is called away it is for a gain and not a loss.
To be able to follow my rules above, mainly the proper stock selection to trade, I placed a Dividend Champions link on my blog menu. I will be updating this list every month as much as possible, or at least once or twice every year so when a stock in my watch list is removed I can react and remove it from my list too.
Note: The list is David Fish’s list and free for every dividend investor and free for non-commercial use. I would like to recognize and give thanks to David Fish for compiling and maintaining this list for small guys like you and me.
· My 2018 Watchlist
Using the process above, I created my watch list for 2018:
The list above (and the shares owned) are for my IRA account but I will be using the same watch list for my ROTH IRA and TD (trading) account.
I wish you all good luck in 2018 investing or trading!