Let’s discuss one of my favorite weekly income strategies that investors can use within their trading without having to manage or stare at the charts all day long…
Advanced Micro Devices Inc. (AMD).
AMD was founded as a start-up in 1969 and focuses on leading-edge semiconductor products that solve some of the world’s most resilient challenges.
Take a look at AMD’s daily chart…
One of the main reasons why I like looking at the daily chart is that at one glance, I can get an overall picture of a particular stock.
And the reason I chose Advanced Micro Devices Inc. (AMD) and why I want you to use a name like AMD, Facebook, Inc (FB), Micron Technology, Inc. (MU), or Apple Inc. (AAPL) is due to volume. You want to choose a stock with an outstanding amount of volume in options – preferably penny wide options.
So, you’re probably wondering what that looks like…
In this example, AMD’s 36.00 puts are 46.00 x 47.00. That is one penny wide, which means that the market makers aren’t profiting.
Now let’s say that in four days, AMD will be trading above $34.00 a share. Here, I have the opportunity to sell a put option for $0.46 or $46.00 for one line if AMD is above $34.00 by expiration. This could give me a $0.40 cushion.
However, in trading and investing in general, you always need to be aware of your max loss.
And in this example, my max loss is huge.
For example, imagine that AMD comes out tomorrow with news and the stock is now trading at $30.00 a share. Well, those puts that I sold for $0.46 are now at $3.55 – that’s a huge loss!
And my profit and loss (P&L) statement is going to crumble if I sell those puts naked.
Profit and loss statements are financial documents that recap revenue and expenses during a specific period of time.
Yet, I can avoid this from happening by buying the $33.00 puts at $0.18 on the ask, which now covers my max loss. With this, I’m not receiving the $46.00, but I will accept close to a $30.00 credit. Now I’m collecting $30.00 per one contract as long as AMD stays above $34.00 a share.
To prove my point, let’s say that AMD as bad guidance and its shares are now $30.00. Now, my max loss on the trade is $70.00, so my max gain is $30.00. Even if AMD goes to $30.00 or $20.00 a share, my max loss is capped.
Now, what’s my break-even?
I can go to the $34.00 puts that I just sold and subtract what I collected (0.30) to find my breakeven on the stock, which is $33.70. And as long as AMD is above $33.70, I make money.
But what is this approach called? A Bull Put Credit Spread and you can use this week in and week out to sell option spreads.
And selling option spreads is one consistent way to create income for your trading account.
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