[Options] Bam! Another Opportunity to Sell Some Puts

Sean McLaughlin
October 5, 2022

Even though stocks have broadly advanced on the first two trading days of October and Q4, today's market action reminds players that stocks are still risky here and the options market continues to price in this fear in the form of higher than normal options premiums.

As such, the odds favor net premium sellers in these conditions -- so that's what we're on the hunt for.

Ideal setups are ones in which a nearby support level has revealed itself so we can lean against it for risk management purposes.

One such setup can be found in Brookfield Asset Management, $BAM:

 

The low of $40.25 set on September 29th feels like it can mark the low of a fakeout-breakdown. And as we like to say around here: from failed moves come fast moves! 

And with implied volatility on the rise, it offers us a nice opportunity to sell some elevated premium for a tactical, high-probability bet:

Here's the Play:

I like selling $BAM November 40 puts for approximately $1.00 or better. This is a naked short position that comes with undefined risk, therefore the position will require approximately $700 of margin per contract. We'll keep our position size conservative and we'll tightly manage our risk -- especially with earnings scheduled to be announced on November 10th.

Our defense here is simple: Any $BAM close below $40 per share is signal that our thesis is wrong and I'll want out. I'm not going to argue with the market. Take the likely loss and move on. Likewise, if we're still in this position on the eve of earnings being announced, then we'll close the position down win or lose. It's not worth holding the risk into a potential massive gap down following earnings.

Assuming last week's lows hold, then we'll have no trouble closing our naked puts for a profit at a 50 cents debit. As I often do, I like to close naked short puts profitably when I can capture 50% of the original premium collected. I don't want to be greedy, I want to be more hit-and-run.

If you have any questions on this trade, please send them here.

ASO subscribers who missed last week’s live video Jam Session where we review activity in our options portfolio from the past week can catch it here.

~ @chicagosean

P.S. We do trades like this regularly. If you'd like to leverage Best-in-Class technical analysis into smarter directional options trades, try out All Star Options Risk Free! Or give us a call to learn more: 323-421-7991.

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