Trade Alert: A Backup Plan

For Black Friday, which technically was Thanksgiving Thursday this year, I planned to fight the crowds at Target to grab a Christmas gift for my daughter — an Audi Power Wheels ride-on that was discounted by more than 50%.

Before I headed out the door, I checked online and found one at Walmart listed for just $20 more. I wouldn’t even have to go into the store.

I didn’t have much luck convincing my wife that avoiding the crowd was worth $20, though. I set out for Target — and I came home empty-handed. The mobs who’d been waiting in line for hours were already checking out before I entered the store.

This time, it paid to have a backup plan. I was still able to get a good deal by simply looking online instead of being committed to the bottom-barrel prices the doorbuster deals offered.

I use a similar approach when it comes to investing, and it’s why I have two trades for you today…

Buy Two Protective Puts

Our portfolio right now is equally balanced between our naked call options (which are bets a stock will fall) and our short put options (which are bets a stock will rise). I initiated the new strategy to sell naked calls a few months ago because we are nearing a top, but timing the exact turning point is extremely difficult.

So I have picked the best candidates for each strategy at this given moment, to increase the odds of each trade being a winner. As the market environment changes, I will adjust our portfolio accordingly to make sure we are in the best position to reap profits.

We also have six open long stock positions: BP (NYSE: BP), Omega Healthcare (NYSE: OHI), Intel Corp. (Nasdaq: INTC), Coach (NYSE: COH), CSX (NYSE: CSX) and AES Corp. (NYSE: AES).

Because I love to have a backup plan, three of those have protective puts in place to limit our losses in the event of a stock market decline. We have covered calls on Intel, and the stock is above our strike price at the moment. But that still leaves two long positions that are currently unhedged: Coach and CSX.

Today, I want to add protection to those as well, so we can be prepared no matter what the market throws at us.

Action to take: Buy to open the COH February 2016 $30 put option (COH160219P00031000) at the market. At last glance, it was trading at $1.75.

Action to take: Buy to open the CSX February 2016 $28 put option (CSX160219P00028000) at the market. At last glance, it was trading at $1.30.

With these two trades, we are limiting our downside risk, while still benefiting from any capital gains as well as collecting dividends.

In Coach, this leaves us with a worst-case scenario of roughly a 12% loss, including our option and dividend income. In CSX, this equates to a worst-case scenario of a 17% loss, including our option and dividend income.

For both stocks, I will look for opportunities to sell covered call options and generate even more income.

Regards,

Chad Shoop
Editor, Pure Income