Thursday, January 23, 2020

To "buy low," use a limit order?...or sell puts?

sellputsthencalls against exchange traded funds in my IRA.  In the last month, I had an interest in buying XLE, the ETF that holds 28 energy stocks.  On 12/23/19, it traded at $59.88, but I wanted to buy low, at $59.71.  (In this discussion, all XLE prices reflect the dividend adjustment for the $1.79 div that was paid on 1/3/20; except for the XLE put premium, which was not div adjusted.)

Consider 2 alternatives:
  • I could have used a limit order to buy XLE lower, at $59.71, good-'til-cancelled.  Had I done so, since XLE dropped below $59.71 on 12/30/19, I would have been a buyer on that day.  I'd have then sold the 1/17/20 covered calls against my XLE shares to help me to sell high.  
  • Instead of using a limit order, I chose to sell a cash secured put against XLE to help me to buy XLE low.  I sold the XLE 1/17/20 put with a $59.71 strike price & was paid a 93 cent premium into my IRA on the next day.  Of course, for accepting 93 cents, I also accepted the obligation to buy XLE shares at exactly the $59.71 strike price if the price of XLE dropped below $59.71 from the time I sold the put until the close of option expiration Friday, 1/17/20.  During that time frame, XLE moved below & above $59.71 a few times.  On Friday, 1/17/20, XLE closed 59 cents below the strike price at $59.12, the put was assigned against me, & I was forced to buy XLE shares at the $59.71 strike price.  My put premium adjusted cost for the XLE shares was $58.78.  I was pleased.  My XLE shares were bought quite low.  But since then, my XLE shares are trading lower, currently at $57.28.  I want to sell the 2/21/20 covered calls against my XLE shares, but with XLE this low, I'm waiting for XLE appreciation.

To "buy low," is it better to simply use a limit order?...or to sell puts?

12 comments:

  1. David - I really appreciate your writings! I "follow" you in Fidelity. Ken

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    1. Ken, you might enjoy today's post. Gut-wrenching, but helpful. Dave Skonieczki (sellputscalls)

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  2. Thank you (again) Ken. Just after your post on this blog this morning, I saw an email notification of it. I recognized your name immediately & presumed that your post this morning was on the Fidelity forum. I just realized that it was on this personal blog of mine. I appreciate your interest...in this blog & in buying my primer, as well as on the Fidelity forum. I must begin to promote this blog & my primer a bit more aggressively to create more visibility. The Fidelity Investor Forum is so well viewed that I do receive some reaction to my posts there. I'd like to generate more reaction here. I'm glad to see yours today. By the way, my XLE shares that were put to me are getting crunched (coronavirus?), so I'm still waiting for appreciation to sell covered calls against XLE. A risk of stock ownership...via put selling or limit orders! But both strategies soften the blow a tad. Dave Skonieczki

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    1. Thank you, Rotana Telecom IPRN. I'm pleased to be helpful. I'd be interested in hearing about your option trading strategy. David Skonieczki

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