Options Trade #32 - CTL Cash Secured Put - Wheel of Fun


VTS Community,

With S&P down today, volatility still elevated, I still don't quite have the green light to get into long MDY stocks or aggressively short volatility, but that's ok I'm a very patient investor.  In the meantime, since I had 6 option trades end on expiration last Friday, I'm mostly in cash within the VTS Discretionary Options strategy.  So this week I'll be looking at four new trades, one per day.

That's typically how I like to trade.  I could easily rattle off 4-5 trades today and get them all open, but I do feel like spacing them out means they are opened at slightly different prices and adds some diversification. 

Also I think it's a good habit to develop to always favour patience and under-trading rather than over-trading.  It will serve you well going forward if you curtail the need to jump into everything immediately.  So I'll do one discretionary trade per day this week.


Today's trade is a go to favourite, the "Wheel of Fun" and it's on a stock that was asked about by a member of the community.  It's a very good candidate for this type of trade. 

-  We're looking for undervalued stocks -  Preferably that pay dividends because they can be more stable -  Beaten down in price lately so we can get a nice premium

CTL Centurylink 1-year chart:


I like it, and it pays a fat dividend which may come into play depending on how the trade goes.


The Trade: 


"Wheel of Fun" Short Put on CTL  (Centurylink)

SELL to OPEN 2 x 15 Feb 19' CTL 15.00 Put Credit:  ~ 0.50 Days to expiry:  24

* prices move around, so just get the highest premium you can.




Margin Requirement:

-  I always trade these "cash-secured" meaning I reserve the full capital required to own the shares outright if assigned

-  1 option contract  =  100 shares if assigned -  100 shares of CTL @ 15.00  =  1,500 -  This trade requires 1,500 per contract -  2 contracts requires 3,000 margin

-  The VTS Discretionary model portfolio is reset for 2019 so it's at 25,000.00 to start the year.

-  3,000 is 12.0% of the portfolio

* You can scale your trade to roughly 10-15% of your VTS Discretionary funds


Stop-loss:

-  I always use a 10% stop-loss on this type of trade -  1,500 per contract is what the trade is valued at -  1,500 * 10%  =  150

* If I'm down more than 150$ per contract I will close it

Centurylink is currently trading at 15.45.  My strike price is 15.00 with a premium of about 0.50, making the break even cost basis around 14.50.  That's a little over 6% below the current price and then it has an additional stop-loss below that.

So you can see, this trade allows me to take a bullish position while still maintaining a comfortable margin for error to the downside if these markets turn south again. 

 

Wheel of Fun strategy video below:


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