In yesterday’s Trade of the Day, I wrote about naked put selling. And I showed you how we cashed in on Cisco Systems. We’re doing it again in The War Room, but this time with Freeport-McMoRan (NYSE: FCX).
If you’ve been in The War Room for a while, you know that we’ve taken profits on Freeport-McMoRan already this year. But that was on the call side when we bought long-term equity anticipation securities (LEAPS) options.
Here’s a quick rundown of the put selling lesson from yesterday…
When you sell a put option, you are obligating yourself to buy shares of the stock you sold puts on at the strike price that you sold them at… if the shares close at or below the strike price at expiration.
Of course, if the shares trade below the strike price before expiration, the buyer of the put that you sold can also “put” you the shares (force you to buy the shares). However, that rarely happens unless the shares are well below the strike price.
So when you sell a put, you get cold hard cash for taking the risk. As an example, let’s say stock X is trading at $20 and you sell a put with an $18 strike price on it. You will receive cash for taking the risk of having to buy the shares at $18. That money is called the premium.
I like Freeport-McMoRan a lot. It’s a leading copper and gold producer and has been directly impacted by the China tariff war. A week ago, some headway was made with the U.S.-China trade talks when both sides conceded a bit. That’s a start.
If the next stages of talks are successful, copper could be off to the races. But if the two nations take longer to come to an agreement, copper could correct and so could Freeport-McMoRan.
The former is what War Room members want to happen with their put sell.
They sold puts 40% below the current price, and the only way they’ll get “put” (less than a 23% probability) is if Freeport-McMoRan drops precipitously. If it doesn’t, they’ll still make money for trying to own it, as War Room members received a nice premium for their efforts.
Freeport-McMoRan is a volatile stock that can go up or down 5% in a day. Knowing this, I recommended that members go in light with this put sell, knowing that they might be able to add to their position in the coming days.
In The War Room, we look at every strategy in the book to try and make you money. Then we add our own experienced take to make sure we recommend buying properly. In this case, members are looking to add on a down move – they know that going in.
So if it happens, members will not be caught off guard.
It’s this type of detailed instruction and analysis that allows members to win often in The War Room. Join me now and get on the winning track!
[adzerk-get-ad zone="245143" size="4"]About Karim Rahemtulla
Karim began his trading career early… very early. While attending boarding school in England, he recognized the value of the homemade snacks his mom sent him every semester and sold them for a profit to his fellow classmates, who were trying to avoid the horrendous British food they were served.
He then graduated to stocks and options, becoming one of the youngest chief financial officers of a brokerage and trading firm that cleared through Bear Stearns in the late 1980s. There, he learned trading skills from veterans of the business. They had already made their mistakes, and he recognized the value of the strategies they were using late in their careers.
As co-founder and chief options strategist for the groundbreaking publication Wall Street Daily, Karim turned to long-term equity anticipation securities (LEAPS) and put-selling strategies to help members capture gains. After that, he honed his strategies for readers of Automatic Trading Millionaire, where he didn’t record a single realized loss on 37 recommendations over an 18-month period.
While even he admits that record is not the norm, it showcases the effectiveness of a sound trading strategy.
His focus is on “smart” trading. Using volatility and proprietary probability modeling as his guideposts, he makes investments where risk and reward are defined ahead of time.
Today, Karim is all about lowering risk while enhancing returns using strategies such as LEAPS trading, spread trading, put selling and, of course, small cap investing. His background as the head of The Supper Club gives him unique insight into low-market-cap companies, and he brings that experience into the daily chats of The War Room.
Karim has more than 30 years of experience in options trading and international markets, and he is the author of the bestselling book Where in the World Should I Invest?
