2016 has been the year of trading headlines. Be it crude oil or Federal Reserve rate hikes, headlines have sidelined homework. Since the February rally started, valuations have come too far too fast without measurable fundamental reasons. It has become difficult to come across stocks that are a screaming buys.
This is not the same as saying that stocks are overvalued, nor does this mean that we stop doing homework. The focus on headlines will eventually abate, and fundamentals will become paramount in the long run.
For the short term, I am left looking to trade the current ranges.
There are a few quality tickers that are worth trading. Rather than buying equities near all-time-high levels, I’d rather use the options markets, where I can take finite risk for attractive yields. This would allow me to take calculated risk even on arguably deteriorating fundamentals.
Here are three to consider.
Stocks to Generate Free Income: Walt Disney Co (DIS)
Click to Enlarge Walt Disney Co (NYSE:DIS) has been on a roller coaster for the past year.
Unfortunately for bulls, fantastic results in the theaters failed to offset worries over the so-called cord-cutting effect. DIS stock is down over 9% for the past 12 months. Moreover, on September 21 when markets were up 1%, DIS closed down 0.6%. This is proof that DIS still is out of favor with Wall Street.
This often offers an opportunity to cautiously go long a quality company provided the health of the core business is not in doubt. Technically, Disney stock is vulnerable for more downside, which is more reason to use options.
The Trade: Sell DIS Dec $85/$80 credit put spread. This is a bullish trade for which I collect 56 cents per contract. Ideally I need DIS stock to stay above $85 per share this year. This represents an 8% price buffer and a 90% theoretical chance of success. I stand to gain 11% on money risked.
The Twist: Normally I like to balance my trades with an opposing one, but in this case, I will opt to delay entry of a credit call spread. On my radar is selling the DIS Dec $100/$105 credit call spread and collecting an additional 53 cents per contract, thereby reducing the dollars at risk and raising the overall potential yield.
Stocks to Generate Free Income: Wells Fargo & Co (WFC)
Click to Enlarge Wells Fargo & Co (NYSE:WFC) has been under intense fire, and for good reason. Some of their employees got caught cheating clients. The story is scary, but eventually a bank of this caliber will come out from under this dark cloud.
I realize that I could be early, so I will build a decent margin for error. This allows me to change my mind without incurring major damage. Technically, without a bounce soon, WFC is vulnerable to a decent fall.
The Trade: Sell the WFC Jan $41/$39 credit put spread. This is a bullish trade for which I collect 30 cents per contract. If successful, this trade yields 15% on risk. For this, I need WFC stock to stay above $41 per share through mid-January. WFC could fall another 10% before reaching my short strike.
Here also I will withhold selling an opposing credit call spread. If I need a hedge, I’d rather sell short the Financial Select Sector ETF (NYSEARCA:XLF).
Stocks to generate income this fall: Costco Wholesale Corporation (COST)
Click to Enlarge Costco Wholesale Corporation (NASDAQ:COST) is a formidable retailer; I shop there weekly. Management is a proven performer, so any substantial drop in the COST stock price is an opportunity to bet long on it.
Technically, it needs to hold the long-term higher-low trend or risk falling further, so it’s important that I build a decent buffer for my long positions.
The Trade: Sell the COST Jan $135/$130 credit put spread. This is a bullish trade that potentially pays me 71 cents per contract. I set this trade 11% under current levels and still promise a 14% yield on money risked. Theoretically, this trade has an 85% chance of success.
I am not obliged to hold these trades through their expiration dates and can close any of them for partial gains or losses.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and StockTwits at @racernic.
