5 September Cash Secured Puts Trades On Dow Jones Index's Good Dividend Stocks

Donald E.L. Johnson - Stock Picking, Options Trading for Income - Mon Sep 4, 2023

By Donald E. L. Johnson

Cautious Speculator

September opened bullish but the probability that it will be a bearish month is pretty high even though several technical analysts are bullish.
Investors can sell cash secured puts on financially safe dividend stocks or on DIA, which tracks these five stocks and 25 weaker stocks in the Dow Jones Index.
The five companies discussed look like they will be able to refinance their debts despite continuing high interest rates and tight credit markets during the next few years.
This educational article is for newer and experienced traders of puts and calls stock options who are comfortable with taking risks in the stocks and options markets.

September trading opened with markets looking like this will “be the biggest bull trap in 23 years” and the markets will dip or correct as they usually do in September because the strongest stocks are over priced, not because of seasonality.

In this kind of situation, cautious income traders can buy strong stocks and sell covered calls on them deeply out of the money.

Or bargain hunters can sell cash secured puts to generate options premium income while they wait for financially strong stocks to dip to the strike prices where they would like to buy them.

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Another alternative is to sell puts on the DOW Industrials SPDR (DIA) exchange traded fund instead of on all of the stocks tracked by the ETF. DIA is trading at $348.98, has an 88% buy rating on Buychart.com and a $418.23 point and figure price objective on Stockcharts.com.

The advantage of selling puts on the stocks is that an investor trades options on the stronger stocks in the index. Trading five of the best stocks in the index makes more sense than selling puts on the 25 stocks that I think aren’t as strong or as safe as the ones discussed here. This article is about selling puts on stocks that have relatively low debt and can do relatively well if high inflation continues and interest rates remain high.

As The Wall Street Journal reported last week, a lot of deeply in debt companies will be refinancing their debt in the next two to three years. With some analysts predicting that interest rates will stay high for several years, some companies will refinance their debt at higher interest rates. This means that risk averse investors are looking for financially strong companies that can weather the interest rate risks.

That is when investors look to strong blue chip stocks like those in the Dow Jones Industrials Average index of 30 stocks.

Please click on images and zoom in for better views.

Five stocks look promising. Another five stocks that can be traded in defense of further inflation, according to Morningstar.com, are: Agilent Technologies (A) , Alphabet CI A @GOOGL, RTX Corp. (RTX) , Veeva Systems Inc. (VEEV) and Walt Disney Co. (DIS) .

My five stock picks’ average dividends are a little above average and they have been growing their dividends regularly for more than 10 years. The companies’ interest coverage ratios are relatively strong and their pay ratios are relatively safe. But there are no guarantees. Technologies, customers and politicians can change things at any time.

Four of the five stocks’ returns on assets are at the top of their five year ranges and they all are generating good returns on equity.

Cisco Systems Inc. (CSCO) and Chevron Corp. (CVX) are trading at low price to free cash flow ratios while the average for the group is a pretty fair value of about 17.6 P/FCF ratio.

Analysts like these stocks.

More important, these point and figure charts show that investors like the stocks. Note the bullish PnF price objectives based on recent market actions: CSCO $63.49, (CVX) $174.53, Proctor & Gamble Co. (PG) $200.96, Visa Inc. (V) $286.24 and Walmart Inc. (WMT) $187.10. I own PG.

Please click on the image and zoom in.

My Excel spreadsheet calculator shows the low risk and low return on risks trades that I am considering.

As shown, the margin of safety between last Friday’s closing prices and the strike prices averages about 5.3% on 17-day trades. These are short duration trades because I like to reduce my risk of assignment by doing several short duration trades instead of, say, a 45-day trade. Other investors do longer duration short puts trades because they think that gives the trades more time to close above or below the strike, depending on their goals.

Returns on risk and annual returns on risk are intentionally low because the probability that the equities will expire above the strike prices, or out of the market, average about 91%. That means it is unlikely that the puts will be assigned and sold to investors unless they trade at higher strikes, higher RoR and at a higher risk of having the equities sold to them. Some technicians believe that stocks will continue to rise. If so, these trades will be easy winners.

The goal is to do these OTM trades as long as possible until the stocks are assigned. If the stocks rise, the puts will expire worthless and traders will pocket the premiums. Then experienced options traders will sell the puts again at higher strikes depending on where the stocks’ prices are. If the stock prices sink but close above the strike, the puts will expire worthless and it will be time to sell the puts again at commensurately lower strikes.

If the stocks close below the strikes, investors might take the assignments and sell covered calls options on the stocks until they’re called. While they own the stocks, traders can collect their dividends until they are called.

Generally, when a stock is assigned and sold to me, I will sell the calls at the money to get the highest possible options premiums. Doing that increases the risk of having a stock called and missing out on further stock price appreciation, but that is part of the strategy.

When stocks or ETFs are put to me, I sell covered calls on them until they are called. Then I sell puts on them if I want to buy them at lower prices until they’re called again. That is called trading the wheel, and it is part of the strategy of buying dividend stocks and selling puts and calls on them for options premium income.

Traders who do all six trades will put up about $118,308 in cash to secure one put for 100 shares per contract for DIA and each of the five stocks. That assumes that at least $14,484 is invested in each trade. Take out the DIA trade and the investment would be $85,340. Every trader has to do trades that reflect his or her financial resources and goals. I don’t have positions in any of these stocks but I reserve the right to trade them any time.

Why I sold Dollar General Puts

On 9.1.23, I posted this slightly edited report in the comments section of my last puts trades update:

9.1.23. Dollar General Corp. (DG) is down sharply on lousy earnings and guidance. It's a great company that will bounce back next year. So I did some bottom fishing. I sold DG 9.29.23 expiration (28 days) $125 strike puts (delta -.27) for the ask price of $1.50 when the option was $1.40 bid, $1.50 ask. OTM probability was 70.8% and implied volatility was 26.4%. Wall Street analysts are lowering their target prices to $135 to $181. Before all 21 analysts could adjust their target prices, the high TP was $270, mean was $189.93 and low was $150. For me, this is a speculative income trade and a longer term speculative trade on a company that I expect to bounce back. On my possible $123.50 net debit, the dividend yield is 1.9%.

In addition to the possible trades discussed above, I have sold covered calls and puts on other stocks as previously reported.

These opinions are mine, and I might change them at any time.

Prices shown here will change before I get a chance to do any trades. This article is meant to be educational and for newer options investors who are comfortable taking the risks that the trades won’t work as planned. I think there are some new insights about trading in these kinds of markets for experienced options traders, too. All investing is risky. This is article is not trading advice or meant to be a model portfolio.

Between my weekly portfolio updates, I report my thoughts and trades in the comments section of this and other posts.

I respond to comments on the comments section where readers’ comments are posted. That is, if you have a question about this article or other comments, I'll discuss your questions with you in the comments section below this article.