3 Trades to Generate Autumn Income

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TSLA - 3 Trades to Generate Autumn Income

Source: Rick Tap via Flickr

Selling risk through options can be a good way to generate income. The only hiccup is that current volatility as measured by the CBOE Volatility Index has been low. This causes options premiums to deflate, which forces sellers to step closer to current price than ideal. But with proper levels, I can still get the trade done.

3 Trades to Generate Autumn Income (TSLA SBUX USO)

Selling iron condors means that I want a ticker to stay inside a particular range. I am a fundamentalist, and it’s getting hard to justify going long stocks at these levels. This year, oil headlines have overridden even the most diligent of fundamental research.

Since the mid-February rumor of an oil deal, markets reversed the selloff and rallied furiously. For perspective, the small caps iShares Russell 2000 Index (ETF) (NYSEARCA:IWM) are up 34% since then.

Today, I want to carefully trade tickers on good fundamentals and hope that the surprise extraneous headlines don’t ruin the thesis.

Stocks to Generate Autumn Income: Tesla Motors Inc (TSLA)

TSLA Stock Chart
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The vehicles Tesla Motors Inc (NASDAQ:TSLA) produces are impressive, but its business model is challenged. TSLA needs several miracles to happen before it can live up to its valuation expectations. I’m looking to sell risk against recent support and resistance levels.

To do this, I sell the TSLA Nov $160/$155 credit put spread. Against it, I sell the Nov $245/$250 credit call spread. In total, I collect 85 cents per contract to open.

Ideally, this iron condor yields 20% on money risked with a price buffer of 20%. Ideally, I need TSLA stock to stay between $160 and $245 per share through mid-November.

Stocks to Generate Autumn Income: Starbucks Corporation (SBUX)

SBUX Stock Chart
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Starbucks Corporation (NASDAQ:SBUX) is a well-respected company with good management and solid fundamentals.

SBUX stock, however, is down on its luck and I feel comfortable going long it here. I know that this may not be the floor but it is worth the risk to me.

Sell the SBUX Jan $48.75/$47.50 credit put spread. This is a bullish trade for which I collect 20 cents per contract to open. This leaves me with a chance to yield 18% with a 10% buffer from current price.

Stocks to Generate Autumn Income: United States Oil Fund LP (ETF) (USO)

USO Chart
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In January, I successfully sold USO credit put spreads into fears of more downside. Now the story is different. Oil is range bound, but with wide limits. Therefore, any iron condors would have to be set behind proper levels where price is not likely to go. Or so we thought. As I was designing this trade on Wednesday, OPEC announced a production cap deal. Oil spiked 5.5% on the day.

I can’t promise you that oil is headed to $60-plus per barrel, but I do think that recent support will remain as such for next two months.

Sell the USO Nov $9.50/$8.50 credit put spread. I collect 17 cents per contract. This trade potentially yields 19% on money risked. I need USO to stay above $9.50 through the November OPEC meeting.

Normally, I like to sell an opposing trade to lower my dollars at risk. In this case I will delay entry of it since we may not have heard the last of the rumors. The trade would be to sell the Nov $12/$13 credit call spread. This is a bearish trade for which I collect an additional 14 cents per contract. The parameters are about the same as the credit put spread. Taking both trades would lower my dollars at risk thereby increase my potential yield to 42% if successful on both sides.

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.

Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2016/09/tsla-sbux-uso-options-trading/.

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