Since my last post, we had the Hanging Man followed by a Doji on the S&P 500 and then yesterday’s drop of 1.34% could indicate a strong correction has started. The Russell has completed at perfect double top last month and has already completed an attempt to re-test that top and failed miserably. The Dow Jones? It seems to keep on truckin’ along with the NASDAQ. So if you are a Bear, you should stick to stocks in the S&P 500 and the Russell 2000 that have the same patterns as those indexes. If you are neutral, look to the stocks in the Dow Industrials and NASDAQ with similar patterns. As always, stay away from gappers unless you want to increase your risk.
As some of you may recall, I trade in two IRA’s and mirror the trades in each. I am changing that strategy – I will be doing Covered Calls (CC) and Cash Secured Puts (CSP or Naked Puts) in one and continuing with spreads in the other. Let’s call the CC/CSP account my Conservative account. Not only does that reduce my risk profile, but it also gives me the opportunity to cover a wider range of option strategies in my blog – not to mention getting back to my original purpose for this blog. I will not be looking for accumulation and return in the Conservative account – trades on high value stocks with good fundamentals and a decent dividend.
With that in mind, my first pick is AT&T (T). I’m a bit prejudiced here because I retired from that company. It has gone through the complete cycle from Ma Bell to a stand alone company back to a major communications company. I’m also a customer of U-verse and absolutely love the service. The stock also pays an annual dividend of $1.64 which give a yield of 6.3% at the current price.
So what would be a good price to pay for this stock? The lowest close in the last 2 years is 21.06, but I don’t expect to be lucky enough to pay that price. I decided the start with a JAN10 CSP at 26 (I collected 1.07 on each option) that brings my cost basis down to 24.93 if assigned. This level is just below the recent intra-day low of 25 on 11/2. It also gives me a 4.1% return on margin for the next 2 months.
My intention is to continue to play this stock until I do get assigned – and the sooner the better for the dividends. Sure the option premiums and not too good on this stock, but I figure it’s a good way to enter and I am willing to be patient in this case. Of course, the longer I wait the more dividends I miss out on, but if I can continue to pull in 4% every 60 days, that is still better than the return on the dividend alone. But, if the stock appreciates, then I miss out on that move. Hmm… should be an interesting story. Stay tuned.
Thanks for reading. Your comments/suggestions/corrections are always welcome.
- Jeff
