Walter Energy, Inc. (NYSE:WLT) is becoming a go-to income play for us. Since early July, we’ve profited twice from this downtrodden coal stock (here and here). And we now have another high-probability opportunity presenting itself.
This volatile stock fell more than 75% from its February high at $40.60 to a low of $9.88 in late June. Since hitting that low, WLT has rebounded past its 2008 lows near $11, which is a pivot price level and should act as support on a monthly basis.
Since the June lows did not correspond with new highs in volatility, this represents a bullish divergence and supports the case that WLT has made a price bottom.
If you are comfortable holding on to this inexpensive stock for a potential recovery, then sellingput options could allow you to collect income while you wait to get into WLT at a 20% discount.
Cash-Secured Put Selling Strategy
While the typical investor might use a limit order to buy a stock or ETF at a designated price or lower, the options trader can do one better by selling a cash-secured put.
And if the stock is not below the strike price at expiration, then the premium received is all profit. In other words, you’re getting paid not to own the stock.
There are two rules traders must follow to be successful at selling put options.
Rule One: Only sell puts on stocks you want to own.
The intention of this strategy is to be assigned the stock as a long-term investment (each option contract represents 100 shares). So make sure you have the funds in your account to buy the stock at the options strike price if a sell-off occurs. Paying in full ensures that no additional money is needed to hold the stock for potentially many months or even years until a price recovery.
Rule Two: Sell either of the front two option expiration months to take advantage of time decay.
Collect premium every month on put sales until you are assigned shares at a cost-reduced basis. Every month that you keep the premium is money subtracted from your entry price.
Recommended Trade Setup: Sell to open WLT Sept 11 Puts at $0.40 or better. (This is a volatile stock, so I suggest using a limit order to get the desired price.)
This cash-secured put sale would assign long shares at $10.60 ($11 strike minus $0.40 premium), which is about 20% below WLT’s current price, costing you $1,060 per option sold. If the options expire worthless, you keep the $40 premium, earning a potential 4% return in 23 days.
But remember, you should only sell this put if you want to own WLT at a discount to the current price. If you are assigned the shares, an October covered call can be sold against the stock to lower your cost basis even further.
If WLT does not fall below the strike price before expiration, then you keep the premium you collected, essentially getting paid not to buy the stock.
Note: By using this same income-generating strategy, my colleague, Amber Hestla-Barnhart, has helped her Income Trader members earn $6,000… $19,500… even $150,000 this year alone.Click here to learn how you could do the same.
$1,000 Per Month Trading System You could collect $1,000 or more per month without buying a single stock. Click here to learn how…
