It’s been a busy month. I’ve learned how to do bull put credit spreads and, more recently, bear call spreads. I can make some good cash without owning the shares.
The is a little more complicated than selling covered calls on stocks I own. However, I think it’s a natural step forward for anyone who has learned how to sell covered calls.
I have shown readers how to start doing spreads with as little as $10,000. Even $5,000 could be enough to get going. A trade often needs from $1,000 to $2,500 of equity (margin money). If you can harvest $100 or more per spread, you can see the potential.
Before you can do these spreads, your trading account needs to be approved to sell naked calls and puts. The amount of money in the trading account is not the issue. The experience and knowledge of the person applying is the issue.
The main benefit of doing spreads is to drop the amount of margin money needed per trade. The amount of margin money needed is set by how far apart strike prices are on the stocks you choose to do spreads on. Stocks that have strike prices $2.50 apart would need $2,500 of margin money per 1,000 shares. Stocks that have strike prices $1 apart would need $1,000 of margin money per 1,000 shares.
I must caution you that doing spreads is not a buy and hold strategy. It takes more work than just owning a stock, or selling covered calls. But generally you can make decent money as long as the stock moves in the general direction you choose and or doesn’t move much at all.
I must warn you that most of the financial industry does not do spreads — likely because it does take more work. But as I understand it, professional traders do spreads all the time, whether it is on commodities, currencies or stocks. Plus, these decisions are totally reversible so I can back out, change my mind or go from bull to bear to bull quite easily.
I also must stress that it is a lot safer to make a little less per trade per spread than to try to make as much as you can and face the danger that you will either have to deliver shares or buy them if the spreads go against you.
I often do spreads into the nearby month. Each spread would need about $900 per trade for the shares that have strike prices $1 apart and about $2,250 per 1,000 shares for stocks that have strike prices $2.50 apart.
It stands to reason that $10,000 could handle at least three larger spreads and maybe eight or nine smaller spreads. Money earned in a trading account would be taxed as capital gain, which is only half taxable.
I have done spreads on Disney (DIS), Home Depot (HD) and Potash Corp (POT) with very good success. Spreads I did on Phillip Morris (PM) and F5 Networks (FFIV) took more work but still worked out.
A lot of U.S. stocks now have weekly options. These can help you bring in extra money, but I find they’re a bit fast for me. Still, if I can pick up $100 after commissions using $900 of margin money for one week, it seems I should learn the skill.
I used to sell naked puts on stocks, and made a lot of money on stocks like TCM from last October to April. But naked puts take a lot of margin money. I do not do naked puts anymore.
Learning how to do spreads could certainly speed up the accumulation of wealth, and would goose up cash flow for anyone.
When you do a bull put spread you are guessing that the shares will go up, or at least not down. Choosing stocks with a rising MACD (moving average convergence/divergence) improves the odds that you will choose the correct direction. Likewise, if you’re doing bear calls, choosing stocks with a falling MACD can make it easier to be right.
Once you get some practice you can likely do a bull put and a bear call on the same stock. You just have to be far enough away from the price of the day so you’re not stuck buying the shares.
U.S. tax laws
A year or two ago the U.S. government passed a law that all American citizens must file a U.S. tax return regardless of where they live.
Last September the U.S. government adjusted its tax laws so citizens could file back taxes voluntarily and not pay any penalties.
It’s better to file the return voluntarily. In most cases a person needs to file the last three returns and financial information for the past six years.
Bombardier (BBD.B): I’ve been loading up on BBD.B since shares were $4.06. My average cost now is $4.32. The stock pays about 2.5 per cent dividend, which looks secure. The company is selling and building a new airplane that burns less fuel and holds passengers and baggage more efficiently than many other planes. Brazil’s plane builder is also selling and building similar planes and is getting a lot of that business. Still it looks like Bombardier will sell enough to have a business. The plane is almost ready for its first test flight and when that happens these shares should pop up.
Tesla (TSLA): This is a totally electric car. The inventor and builder is selling them direct to customers and building the system for recharging or exchanging batteries. The company did a lot of things correctly since early 2013 and shares have jumped from around $20 to $126. I captured some of that and might just buy 100 shares or so and let them do what they do.
Franco Nevada (FNV) and Silver Wheaton (SLW): I used to own both but own just FNV now. It looks like SLW took on some extra debt, so on this rebound FNV has outrun SLW.
Canola streamer: Some months back I wrote about a canola streamer. I put in $10,000 and watched as we received a stock certificate for 10,000 shares with stated value of $1 per share. In July the inventors of this streamer will be using a shell company to take the streamer public, so these shares will then trade on the Toronto Stock Exchange. I will let you know how it goes.
Heinz (HNZ): Years ago I bought a couple of shares of HNZ and signed up for their dividend reinvestment program. A few months back Warren Buffet’s company bought HNZ lock stock and ketchup so I have to do the paper work for them to pay me for our shares. The shares were $45 or so when I started, and we now have 12 or 15 shares that will bring us $72 or so per share. The gain in price is nice. The increase in the number of shares comes from reinvesting the dividends into more shares quarter by quarter.
Cameco (CCO): Uranium stocks might be coming into style soon. Yes, Japan still has problems but it sounds like they will start up their reactors soon. Russia plans to stop selling recycled uranium from its rockets, but some say it will just sell the stuff to other countries instead of the U.S. Cameco’s Cigar Lake mine is scheduled to open soon. I have 1,200 shares and they are up a couple bucks. I will likely sell those shares and buy a naked call when I think CCO is ready to go.
My heart and prayers go out to our readers in various parts of the country that have been hit with high water, fires, explosions and other tragedies. I hope you can pull through these tough times. †