3 Stocks With Premium to Trade Into the Summer
The stock market goes through cycles of volume tied to the time of year. The saying "sell in May and go away" has long been an adage shared by many traders. As the weather is getting warmer and many investors' thoughts begin to shift to the beach, options traders like myself will begin to adjust their trading plans to accommodate for the lower summer trading volume. While I listen to half of this popular saying by "selling in May," I don't think traders need to "go away."
Since options provide many ways to trade, traders should be mindful of what type of strategy is best to use to optimize trading performance based on individual risk parameters and market conditions. Based on my historical results over the years, I've found it beneficial to increase the number of trades using options to sell premium during slower months of the year. Trading options by using credit spreads provides the trader the opportunity to benefit by selling the trade up front to collect premium instead of waiting for a favorite stock to move enough to make buying it worthwhile. While premium might be lower in the summer months, the volatility of prices is also lower, providing favorable conditions to capitalize using this strategy. Increasing the amount of credit spreads I place in my portfolio allows me the opportunity to shift according to market conditions and continue to generate income.
How I Find These Trades
Specifically, I prefer to place credit spreads using a weekly expiry to stay current with market conditions. To begin my search to find good candidates to trade, I look for stocks that trade with a weekly option and that are currently moving in a trend. Next, I review the stock options chain, looking for good premium available in the option. Finally, I ensure that the individual stock doesn't have earnings or other pending news releases during the week I want to trade them. Once I have determined the stock, I sell a credit spread at a level where I believe the stock won't be by the time the spread expires -- either at the money (where the price of the stock is) or out of the money (away from where the price of the stock is).
Three Stocks I Like to Trade This Way
One of my favorite stocks to trade this way is Priceline.com (NASDAQ:PCLN). Priceline is a stock that trends consistently and also has a healthy amount of premium available in the option. Priceline is currently moving in a long trend in a steady manner. As seen on the moves in price from the daily chart below, PCLN has moved consistently from 1120 up to 1259 in just seven days. Price continues to make higher highs and thus leads me to believe it's in a strong trend and an excellent candidate to sell a credit spread.
Netflix (NASDAQ:NFLX) is also proving itself as a good candidate to sell a credit spread. Based on the daily chart below, Netflix looks as though it, too, has settled in to a trend providing opportunities for an option trader to sell a credit spread at or lower than where price is currently being traded. Netflix has moved from 315 to 400 in the last two weeks and looks as though it's poised to return to previous highs at this time.
Another great stock that provides opportunity to sell premium is a stock like Tesla (NASDAQ:TSLA). This stock is known for its ability to really get moving. Of course, this means that there are many good ways to trade TSLA, but rather than just buying the stock or the call, selling a spread can provide an opportunity for a trader to get involved in this mover with the advantages of a predefined risk/reward that a credit spread provides. With its recent move from 180 to its current price of 212, TSLA is showing strength. It offers a nice opportunity to collect premium selling a spread that's at the money or out of the money.
All three of these stocks are good candidates, in my opinion, to sell the spread in order to trade by collecting premium. Based on a trader's assumption about the degree of movement of these stocks, a trader can still be active in the markets this summer. The change in season doesn't have to mean that a trader needs to stay away from the market altogether. By including the strategies of selling spreads to a trader's portfolio, a trader can still participate rather than just "sell in May and go away."
Read more: http://www.minyanville.com/trading-and-investing/stocks/articles/Options253A-3-Stocks-With-Premium-to/5/28/2014/id/55120#ixzz4jHTsqf1D
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