The latest Quarterly Playbook is out, which has given us a bunch of ideas to begin exploring, states Sean McLaughlin of AllStarCharts.com.
One idea stood out for me in particular because of a recent pullback offering a good entry point. It’s in a bellwether dividend-paying stock that we wouldn’t mind owning for the long term, but we’re going to take advantage of elevated options premiums to leverage into a high-probability bet for some opportunistic income.
Check out this multi-year chart of General Mills (GIS):
The recent breakout over $74 was a multi-year breakout. And if you’re a longer-term-minded stock investor, this might be a good time to consider building a position for the long haul.
But with options volatility pretty juicy in this name right now following a one-week pullback on the heels of a recent earnings report, options traders might consider selling some naked puts for a good opportunity to earn a quick hit-and-run gain:
Here’s the Play:
I like selling $GIS September 72.50 puts for an approximately $1.85 credit. This is a naked short position, and therefore we’ll size our position accordingly. We have to account for the risk that we’ll get assigned stock against our short puts position if the stock were to crater on us.
A good rule of thumb is to size the position such that if we were to get assigned stock, the dollar value of the stock position only equals about 10% of our investable capital.
Since we have theoretically unlimited risk here, we’ll manage our position carefully. The risk management level we’ll be leaning again is $72. If we see $GIS close below $72 per share at any time during our hold, that will be our cue to exit the position. Our “bounce” thesis is busted below 72 and therefore we’ll want out.
In the meantime, I’ll leave a resting GTC (good ’til canceled) limit order to buy these short puts back for half of the premium I originally collected. So, in this case, I’ll have a limit order to close working at 90 cents. Take our profits and move on to the next idea. I don’t want to hold the risk all the way until September if I can avoid it.
Learn more about Sean at AllStarCharts.com.