Another way to play IQ (oversold)
Updated
IQ has been oversold for 3 days now. I haven't pulled the trigger because I felt like it might fall farther and there are other opportunities in other stocks coming. I'm still not 100% convinced it's done falling, but there's a way to play this that I might use. Selling cash-secured puts.
This works especially well on low priced stocks for most people because of the capital requirement of having to set aside enough for 100 shares. In this case, it would only be a few hundred dollars with the stock at 3.50.
For example, let's say I can sell a July 26 3.50 call for $10 and get two ways to "win" the trade.
1) the stock price rises. That's my fundamental premise for getting into the trade anyway. I'm expecting this outcome by going long. With this, I still have unlimited profit potential here plus the extra 3% from selling the option. Since it's already 3 days oversold, it's even more probable that a rise will happen in this upcoming week. I can also buy back the option for less than I sold it for if the stock rises significantly above 3.5 at any point during the week.
2) If the stock price falls less than .10 this week I'll still make money. I'll get assigned the stock at let's say 3.45 hypothetically (I'd have to pay 3.50 for it) but since I sold the option for .10, I still profit all the way to 3.40. Again, I'd probably hold from 3.50 to 3.40 anyway given how I do my trades, I'd just get the first .10 fall in the stock price for free essentially.
There are two ways to "lose" here, but I'd argue I'm still better off than buying the stock straight up.
1) If the stock price falls below 3.40, then I'm stuck for the difference. If it falls to 3.30, I still have to pay 3.50 on July 26th. However, the $10 I sold the option for reduces my cost basis to 3.40. I'm still down .10 per share but remember, I WAS GOING TO BUY THE STOCK AT 3.50 ANYWAY. So had I done that, I'd be down .20 right now instead of just .10
2) The stock drops a LOT. This is the "nightmare" scenario because the put option locks me into buying the stock unless I buy the option back at what is now a MUCH higher price than I sold it for. Again though, if I was going to be holding it anyway, the option premium offsets some of the loss and I'm out less than buying the stock straight up. This scenario is why I ALWAYS use weekly options, since that lowers the risk. The huge drop would have to happen THIS WEEK to hurt me. Also, I sell options as far out of the money as is reasonable so I'm not hurt by the initial loss AND in any given week it makes it harder to reach that level.
In this case, the next lowest strike price is 3.00 but I'd only get maybe .02 (x100) and it isn't worth doing for that so I'd go with the at the money 3.50 instead.
Best case scenario would always be I sell a put and the stock goes up and I keep the money, reducing my cost basis and automatically improving my return on the trade as a result. Choosing the right strike and expiration (far out of the money and short expiration) makes that more likely. But again, I only do this on stocks I'm willing to buy anyway and it's best for volatile stocks since the premiums on the options are higher because of that volatility.
I probably won't make this trade on IQ simply because the option premium isn't quite fat enough to warrant it for me. But this same technique is applicable to any overbought stock that sells weekly options, it just isn't always worth it. I haven't used it recently, though I could and should have, and may still, on IREN.
It's a much more volatile stock with juicier options as a result. With IREN at the close on Friday, I could have sold a $9 strike put that expires in 5 trading days and make 1.5% on my money. For me to lose anything, the stock would have to fall more than 20% in one week. Statistically, there is about a 90% chance that it won't. If it doesn't, I keep the 1.5%. If it does drop that far, I'd be buying more anyway unless the reason it dropped was truly catastrophic.
Please note: When a stock is already oversold is the ONLY time I'd ever use this technique. Selling puts when a stock is overbought is a great way to get poor quickly, for example.
For simplicity's sake, I almost always just buy the stock straight up. Option spreads and commissions eat into your profits and makes closing positions early more challenging. It's just more complicated. This is just another way I sometimes like to play it instead when the option premium makes it worth the effort.
I don't love IQ here, but I don't LOVE any stock in a downtrend. I just think there's short term opportunity here. I probably won't actually trade it to keep powder dry for better opportunities.
This is all instructional and opinion for entertainment purposes, not investment advice. Be smart and only take the trades you can be personally responsible for the outcomes of. Have a good weekend!
This works especially well on low priced stocks for most people because of the capital requirement of having to set aside enough for 100 shares. In this case, it would only be a few hundred dollars with the stock at 3.50.
For example, let's say I can sell a July 26 3.50 call for $10 and get two ways to "win" the trade.
1) the stock price rises. That's my fundamental premise for getting into the trade anyway. I'm expecting this outcome by going long. With this, I still have unlimited profit potential here plus the extra 3% from selling the option. Since it's already 3 days oversold, it's even more probable that a rise will happen in this upcoming week. I can also buy back the option for less than I sold it for if the stock rises significantly above 3.5 at any point during the week.
2) If the stock price falls less than .10 this week I'll still make money. I'll get assigned the stock at let's say 3.45 hypothetically (I'd have to pay 3.50 for it) but since I sold the option for .10, I still profit all the way to 3.40. Again, I'd probably hold from 3.50 to 3.40 anyway given how I do my trades, I'd just get the first .10 fall in the stock price for free essentially.
There are two ways to "lose" here, but I'd argue I'm still better off than buying the stock straight up.
1) If the stock price falls below 3.40, then I'm stuck for the difference. If it falls to 3.30, I still have to pay 3.50 on July 26th. However, the $10 I sold the option for reduces my cost basis to 3.40. I'm still down .10 per share but remember, I WAS GOING TO BUY THE STOCK AT 3.50 ANYWAY. So had I done that, I'd be down .20 right now instead of just .10
2) The stock drops a LOT. This is the "nightmare" scenario because the put option locks me into buying the stock unless I buy the option back at what is now a MUCH higher price than I sold it for. Again though, if I was going to be holding it anyway, the option premium offsets some of the loss and I'm out less than buying the stock straight up. This scenario is why I ALWAYS use weekly options, since that lowers the risk. The huge drop would have to happen THIS WEEK to hurt me. Also, I sell options as far out of the money as is reasonable so I'm not hurt by the initial loss AND in any given week it makes it harder to reach that level.
In this case, the next lowest strike price is 3.00 but I'd only get maybe .02 (x100) and it isn't worth doing for that so I'd go with the at the money 3.50 instead.
Best case scenario would always be I sell a put and the stock goes up and I keep the money, reducing my cost basis and automatically improving my return on the trade as a result. Choosing the right strike and expiration (far out of the money and short expiration) makes that more likely. But again, I only do this on stocks I'm willing to buy anyway and it's best for volatile stocks since the premiums on the options are higher because of that volatility.
I probably won't make this trade on IQ simply because the option premium isn't quite fat enough to warrant it for me. But this same technique is applicable to any overbought stock that sells weekly options, it just isn't always worth it. I haven't used it recently, though I could and should have, and may still, on IREN.
It's a much more volatile stock with juicier options as a result. With IREN at the close on Friday, I could have sold a $9 strike put that expires in 5 trading days and make 1.5% on my money. For me to lose anything, the stock would have to fall more than 20% in one week. Statistically, there is about a 90% chance that it won't. If it doesn't, I keep the 1.5%. If it does drop that far, I'd be buying more anyway unless the reason it dropped was truly catastrophic.
Please note: When a stock is already oversold is the ONLY time I'd ever use this technique. Selling puts when a stock is overbought is a great way to get poor quickly, for example.
For simplicity's sake, I almost always just buy the stock straight up. Option spreads and commissions eat into your profits and makes closing positions early more challenging. It's just more complicated. This is just another way I sometimes like to play it instead when the option premium makes it worth the effort.
I don't love IQ here, but I don't LOVE any stock in a downtrend. I just think there's short term opportunity here. I probably won't actually trade it to keep powder dry for better opportunities.
This is all instructional and opinion for entertainment purposes, not investment advice. Be smart and only take the trades you can be personally responsible for the outcomes of. Have a good weekend!
Note
If anyone is interested, here's the CBOE list of all stocks and ETFs that have weekly options.cboe.com/available_weeklys/
Note
Whew, this is one I'm glad I decided not to take when it first came on my radar screen. That first lot would be down over 40% and I'd be holding 9 lots if I'd have taken it. That makes up for the ones I didn't take that went up, I guess.
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