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Yesterday I talked about how I focus my trading on high-probability opportunities instead of high-risk trades. This focus on the likelihood of results instead of how exciting the results might be is a key part of my income strategy.
If you would like to learn more about how I trade for income, please do not miss my event this upcoming Wednesday, Sept. 28 at 12 p.m. EDT. I cover the primary strategies used in High Yield Trader, plus several real-time trades. Click here to register for the event.
To show you exactly what I mean, here’s a specific high-probability trade that I sent to my readers earlier this month.
I’ve chosen the SPDR S&P Oil & Gas Exploration and Production (NYSE: XOP) for this trade.
Before I get into the nitty-gritty specifics of how to execute this trade, let me rattle off a few benefits of trading this way:
1.) By selling puts on XOP we can agree to buy it at a 12.8% discount.
At the time I issued this alert, XOP was selling for over $37. I recommended selling the $33 puts, which would require us to buy XOP in the event that it fell to that price on or before Nov. 18. That’s a 12.8% discount…
Now, there’s nothing unusual about putting in a bid at a lower price. Anyone can enter a “stink-bid” at any time. What’s unusual about this particular type of bid is…
2.) By selling puts, we get paid up front
In this case, we could bring in 60 cents per share – or $60 per contract.That’s 1.8% in income that we would not get for just entering a stink bid.
But even better…
3.) We know exactly how likely we are to get put shares – or in other words, we know the exact odds we will see our puts expire without any obligation on our part. That’s because most (if not all) brokerage accounts offer free probability analysis for all options positions.
Here’s what this real-time analysis looks like in my TD Ameritrade Think or Swim platform:
Notice the “Prob.OTM” column that’s on the far right. This column actually lists the probability that each and every options contract will expire out of the money – meaning we don’t have to buy or sell anything – live during the trading day.
In summation, selling the $33 puts lets us agree to buy XOP at a 12.8% discount, get paid 1.8% income up front, and lets us know exactly how likely it is we will be required to buy the shares at expiration on Nov. 18.
If the markets remain unchanged and XOP trades above $33 at November expiration, you won’t have to buy the stock. You keep the $60 premium. That’s a 1.8% return on capital in less than two months.
More on Put-Selling Trades
If XOP trades below $33 at November expiration, you’ll own XOP at $32.40 (the $33 strike minus the $0.60-per-share premium). The price ($32.40) is 12.8% below XOP’s current market price of $37.16. This gives us very good downside protection.
More importantly, we will continue to sell puts, lowering our cost basis each time, until we are assigned the stock.
You can’t execute this exact trade today, since XOP has fallen since I first issued this trade, but if you want to find out how to make this kind of income trade live, I urge you to attend my free put-selling event tomorrow at noon. Click here now to attend.
I will be revealing three free put-selling trades that could immediately add $217 to your brokerage account.
Kindest,
Andy Crowder
Chief Options Strategist