Trading in a Mixed Market
Mixed day on the market but the chatter is that we will continue to rise into year end. The Dow was down, the S&P 500 barely up but the Nasdaq shined. I am somewhat leery of the forecasts that we will end the year higher. While statistics are in favor of having the traditional ‘Santa Claus Rally’ it just seems like election euphoria is getting stale. I am taking my usual conservative stance.
When the market is mixed, so is my option trading. I closed four put and three call contracts, which is about normal for me. Most of my focus involved writing contracts to set up my week. I wrote puts on stocks I want to own but don’t (SNOW, BX, VST), puts to fill out existing positions I already own (NVDA, CMG, VIK) and puts to fill naked calls that I have created when I closed its matching put (ORCL). All these stocks were down today, I only write puts when a stock is down. I expect a few will bounce back a little tomorrow and I will probably close half of the contacts I wrote today. It only takes a 1-2% drop in a stock to potentially make it a good put candidate. The following day, it generally recovers that 1-2%, making the option profitable and closable.
I also wrote calls on stocks that were up. I wrote covered calls on ZTS and AMD, both positions I would like to keep longer term but use writing calls to add to my income stream. Then I wrote calls to match puts I have already written that now looks as if I may be put (ALB, MU). All these stocks, I have written calls on many times before and routinely close them the next day. In any given week I will write a call contract on my AMD position and close it maybe three or four times. If it is a week when the market gyrates a bit, moving up and down day to day and intraday, I get a lot of chances to do this.
I made the most today on a put contact on General Electric Vernova (GEV) which I had written last Wednesday. I would like to own GEV but it is up a lot this year. It has a current P/E of 79 and a PEG ration of well over 2 (where 1 is considered a stock at fair value) it is too expensive now for a value investor like me. I would like to buy it at least 20% below where it is currently trading (about $340 - so I would like to get in at $270). I can get there by writing a $300 put with a premium of $30, but I must go out to June of next year to get a premium this high. Fortunately, it is a ‘hot’ stock (momentum traders seem to like it) so there are plenty of buyers and sellers of puts even that far out as people want insurance as GEV has run up over 180% year to date. It is a bit risky but, again, as it is a popular stock with a lot of interest, I can get in and out of any contract I write for it relatively quickly.
I kick myself for not investing in GEV when I had the chance in January. It has a reasonable P/E and was getting a lot of good press - I would have made a lot more than what I have made trading options on it for the year. I have earned less than 20% of what I would have earned owning the stock itself. If you believe in a stock and can afford to, buy it. I didn’t because it would have tied up too much of thecash I need to keep aside for writing puts like I do. Selling puts will earns money, but the profits in the market come from picking a good stock and riding it up. Invest, don’t trade, when you can.