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After closing that November-expiration put write for a quick and easy profit, we rolled out the trade and sold to open the December-expiration puts for even more income.
When that put write expired in the money, we accepted the stock.
Ties to Hiring
We were initially bullish on CTAS because of its strong ties to hiring in the services sector. Because CTAS supplies work uniforms and laundry services for workers in the retail and dining industries, their success is directly tied to a strong job market.
The market rallied on positive expectations for fourth-quarter earnings and a more accommodative Federal Reserve in 2019. This means employment, especially in services sectors, should continue to grow. All those new employees need uniforms, and CTAS will provide them.
CTAS has Short Term Resistance
Most stocks, including CTAS, are still well off of their highs following the market’s drop at the end of December. The market did turn around and head higher after getting some positive news from the Fed, but it is rare for the major indexes to successfully complete a “V-shaped” reversal without some period of consolidation.
Because we are expecting the market to consolidate here for a bit, and in order to limit risk and generate income, we want to write calls against our long stock position in CTAS.
From a technical perspective, CTAS looks like a strong candidate.
Daily Chart of Cintas Corporation (CTAS) — Chart Source: TradingView
As we mentioned earlier, we don’t expect the market to turn around right away. In the short term, CTAS looks like it will consolidate sideways.
CTAS has just surpassed its October lows, but $173-$175 could act as a potential area of resistance if the market gets choppy. Additionally, we wouldn’t be surprised to see the price temporarily rejected near $180 per share.
We only expect resistance to be a factor in the short term. So, while we think increasing our hedge by collecting some additional income is appropriate right now, we may want to buy that call back at a cheaper price if the stock drops back to support before our options expire.
If the stock does not consolidate and breaks resistance, we may have some opportunity costs when the calls are exercised.
However, if we do get called out of our position, the exercise price will be equal to our entry price, and we will simply keep the hefty option premiums we have been collecting since October.
To find out which calls we’re selling — and to get access to our full portfolio of income-generating trades — consider signing up for risk-free trial subscription to Strategic Trader today.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader.
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