Since I have suggested selling puts on UYG, there has been several asking about this. So much so, that I felt another post about selling puts were in order.
Selling puts is a bullish (want the stock to go up) move. Since I would be assigned the stock (have to buy it) then I would want the stock to be on the move up. Selling calls the opposite.
Everyone knows I am a bear at this time in the cycle. So why be selling puts? UYG is an ETF of financial stocks. Financial stocks are being hit very hard. But the expectation is that financial stocks will still be around. CITI may not, but financials will. It is the job of the ETF managers to see that there will be some around after this problem.
So if we think that eventually someday financials will rebound, we will want to be there. If the stimulus works and everyone starts to spend again, it could be real soon. If it does not work, we could be in for a longer span than most want to admit.
If I sell 3 or 4 strike puts on UYG, I receive premium in my pocket. If UYG goes to 1.00 I am now down from the 3 range now. But when I roll (buy back the front month and sell the next month, I should get around .30. I am doing this with a total of 3.00 in cash held in my account (earning interest).
I have done this with stocks before rolling out for years. The biggest fear is that the stock goes to zero and you have to buy a worthless stock for 3. However each month that you roll gets you closer to a no cost trade. If you are collecting .30 each roll, then in theory 10 months the trade should be free.
Will the financial sector be around for 10 months and will this stock still have value by then? That is the probabilities we are working with.
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From Yahoo:
"Global recession will be worst since 1930s, Greenspan says"
He probably just thought of that and never saw it coming till now.
Mr. Bubbles, uncle Ben, Rubin, Paulson, now Geitner (sp) they are all part of the problem. Now we are giving them more.
I see that GM and Chrysler are back at the trough. This is what you get when you go down this slippery slope.
How do you protect yourself? By doing the un-american thing. Short the sectors most at risk. It used to be risky to short the market, margin etc. now just buy an inverse ETF and let it ride.
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