A Quick Income Opportunity in Wells Fargo

Today I’d like to discuss the ideal setup for selling puts.
Before I get started, I wanted to remind you that I’m focusing this week and next entirely on selling puts and put-selling strategies. I think we’re in the middle of an interesting time in the markets – and it’s time to look at the basic strategies that can work in good markets and bad.
That’s also why I’m hosting a live put-selling training event today at noon. Click here for more details. This event will include three live trades you can make to add $217 to your portfolio by the end of the trading day. Attend this free event.
As always, you should never sell puts on something you wouldn’t want to own…
Remember: Selling a put obligates you to buy shares of a stock or ETF at your chosen price if the put option is assigned.

Selling Puts: Look for Assets Near Long-Term Lows

And sometimes the best place to look to sell puts is on an asset that’s near long-term lows.
The rationale is this: If something at 52-week lows falls further, you’d be fine owning it at even lower prices. If not, you simply enjoy the easy income.
And there’s an added benefit: When an asset is selling near long-term lows, it will typically have higher implied volatility, which acts like an added boost to the price of the put.
Case in point: I was sifting through my charts today and discovered an interesting opportunity in Wells Fargo (NYSE: WFC). If you look at the chart below, you’ll notice that WFC is currently oversold on a short-term basis.
As an options trader, particularly one that prefers to sell options, this is the type of setup that I look for in a trade. The RSI is oversold over several different time frames, (2) and (5), which means that there’s a good chance that a mean-reversion move or reprieve is right around the corner. As a result, I want to sell a few puts on the volatility ETF.

An Exercise in Selling Puts: WFC

Selling a put obligates you to buy shares of a stock or ETF at your chosen short strike if the put option is assigned.
For example, let’s say you wanted to buy WFC, but not at the current price of $45.02. You prefer to pay $42.

By selling the November 42 puts you can bring in approximately $0.61, or $61 per contract. In this instance, you are selling the put with the intent of buying WFC for $42 if, at expiration in roughly 52 days, the stock is trading at or below $42.

Selling the November 42 put requires you to have $4,200 of cash in your trading account.
If not cash-secured, selling puts only require 20% of the $4,200 or $840, but retirement accounts and certain brokers require the puts to be cash-secured. And in this case, that would be the $4,200.
Cash-secured, the return on the trade is 1.5% in 52 days, or 10.5% in income annually.
And if the puts were not cash-secured, the return would be significantly higher.
As you can see from the same options chain below, you have other strike prices where you can sell puts. If you choose to sell a strike closer to the current price of the stock – say, $43 – you could bring in even more premium (roughly $84) but the probability of success goes from 73.59% for the 42 puts to 65.93% for the 43 puts. So, you do have to make a few decisions as to how much risk you are willing to take based on the strike you choose.

Back to our example: I prefer to sell the November 42 puts for $0.61. The $61 is ours to keep regardless of what occurs with WFC.
If the stock closes at November expiration above $42, we keep the $61 and oftentimes repeat the process by selling more puts, maybe at the 42 strike or possibly at a different strike price. It truly depends on where the stock is trading at the time we sell the puts and how much premium we wish to bring in.
If the stock trades for less than $42 at November expiration, we are assigned the stock for $42 per contract or $4,200 (100 shares per put contract sold). Oftentimes when this occurs I will begin to sell covered calls on the stock so there is an ongoing source of income coming in. I take this approach in one of my High Yield Trader portfolios, appropriately named “The Income Cycle.”
Again, Ian Wyatt and I will be hosting a webinar today  at 12 pm ET.
During this live event today, I’m going to show Ian how he can collect $217 in roughly five minutes – in his personal investment account.
You can click here to register for this event.