While Sears Holdings Corporation (NASDAQ:SHLD) has seen its share price jump nearly 50% in the past few weeks, the beleaguered J.C. Penney Company, Inc. (NYSE:JCP) has not been so fortunate. After hitting a high of $14.65 on Sept. 9, JCP succumbed to selling and is within striking distance of multi-year lows once again.
Ownership and management changes have done little to move the stock price, which has been stuck in a range from $14 to $12 since the beginning of August.
Traders should watch for bullish divergence if/when the stock hits new lows. If new lows are made without new highs in volatility, that could signal a bottom. JCP has not been below $12 since 2001.
If you are comfortable holding on to this inexpensive stock for a potential recovery, then selling put options could allow you to collect income while you wait to get into JCP at a 13% 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.
This strategy has the same mathematical risk profile as a covered call. When selling puts, there is an obligation to buy the stock at the strike price if it is assigned, allowing you to get into the stock at a discount. In fact, the true entry cost basis is even lower with the subtraction of the premium you earned from selling the puts.
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 puts.
Rule One: Only sell puts on stocks you want to own.
The intention of the put selling 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 from selling puts 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 JCP Oct 11 Puts at $0.30 or better. (Make sure to select the options that expire on Oct. 19, and use a limit order to get the desired price.)
This cash-secured put sale would assign long shares at $10.70 ($11 strike minus $0.30 premium), which is about 13% below JCP’s current price, costing you $1,070 per option sold. If the options expire worthless, you keep the $30 premium, earning a potential 2.8% return in 25 days.
But remember, you should only sell this put if you want to own JCP at a discount to the current price. If you are assigned the shares, a November covered call can be sold against the stock to lower your cost basis even further.
If JCP 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, 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.
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