Long-term Trend Strategy
Basic overview #
Sell 90+ days to expiry (DTE) bull put credit spreads on highly priced, fundamentally solid companies that are in long term up trends.
Detailed Overview #
I screened for companies that are fundamentally (financially) solid; with a price chart that is in a long term uptrend; and currently undervalued.
Selection of companies is similar to that of the Naked Put Strategy.
The main difference is that these companies are around (or over) $200 per share, which means I would need around $20k of capital/margin to sell naked puts on them.
Basically, I would like to own these companies outright, but I can't afford to.
So, I am selling bull put spreads on them instead.
I also used backtester on optionalpha to see how well they performed over the last 5 years or so.
Companies #
For now, here are the companies I will be using this strategy with:
V
(Visa)MCD
(McDonald's)PG
(Procter & Gamble)COST
(Costco)
I may add more in the future, but three is enough for now. I also tried to select companies in different industries, although they're all kind of related. Aren't we all?
Entry rules #
Around the middle of each month, sell a 90 DTE bull put spread on the selected companies. Here are the spreads for each:
V
: Sell put @ 0.15 delta; Buy put @ 0.10 deltaMCD
: Sell put @ 0.15 delta; Buy put @ 0.10 deltaPG
: Sell put @ 0.15 delta; Buy put @ 0.05 deltaCOST
: Sell put @ 0.15 delta; Buy put @ 0.10 delta
Exit rules #
No stop loss on any of the companies.
Slightly different profit take target on each:
V
: 50% profit takeMCD
: 75% profit takePG
: 50-75% profit takeCOST
: 50-100% profit take
Note: May experiment with percentages a bit
Allocation/Risk amount #
Will start with selling 1 spread per month, per company, and work my way up (or down) from there.
This should work out to a bit under $5k of risk.
Since there is no stop loss, I put the risk at the total of the spread. For example, selling a 230/220 spread on MCD
is $1000 of risk.
Summary / Notes #
This trading strategy is basically an alternative to actually investing (i.e. buying shares) in solid, profitable companies.
i.e. If I had a lot of money, I would probably just buy 100 shares of Visa. At time of writing, it's around $245/share, so I would need $24,500 cash to do that.
I could just buy a few shares, but then I would not be able to sell covered calls on it.
Optimally, this strategy will provide a steady source of income each month. Almost like dividend payments.
The main downside, of course, is that any of these companies could tank suddenly for whatever reason, and I would lose the entire cost of the spread.
I tried to be meticulous choosing financially strong companies that have exhibited years of stable price growth. Anything can happen though.