Another week and another sell-off in the broad market. The increased volatility in stocks means we are seeing higher premiums in our options. However, with stocks bouncing up and down through support and resistance limits, we are being more cautious in our trading.
There are a few factors we are facing with our Triple Play Income positions:
1. Covered Calls: We still want to stick to our strategy of selling covered calls when one of our stocks is trading higher 3 to 4 consecutive days in a row. With the current volatility we could see a stock price bounce off a low and run-up well past our entry price. It usually pays to sell calls when a stock price is rising not in decline.
2. Entering New Positions: We discussed in our last Triple Play Income review session adding at least 2 new positions. Each time we’ve looked at adding a new position, the market reversed to the downside leaving us to hold off entering the trade for now. New positions will come in time.
3. Trading Dividends for Premium: On some of our positions, increased volatility has made it more attractive to skip the dividend and sell a put option collecting anywhere from 2X to 4X what we would’ve collected on the dividend. This has especially been true in our inflation beneficiary stocks.
Right now, patience is the key. Several positions are coming back into price ranges that will allow us to roll calls out and up. We have several positions that have sold off but there is plenty of premium to roll our puts out at a profit. And finally, several positions that are down anywhere from 5% to 10% and we will continue to monitor closely before we add trades.
Here is one action we can take today.
Kraft Heinz (KHC): 44.60
Kraft Heinz is one of the few stocks that is trading higher today. We were called out of our KHC position last week. We can sell an out of the money put today for a decent premium ahead of the KHC’s next ex-dividend date on 5/26. Let’s do it.
ACTION: Sell to open KHC 20 May 43 put for a net credit of around 0.39 to 0.42.
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