Stocks for Above Average Cash Creation

A look at stocks I'm targeting for a covered call strategy that's unlike any other.

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This service is for general informational and educational purposes only and is not intended to constitute legal, tax, accounting or investment advice. These are my opinions and observations only. I am not a financial advisor.

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This week we get back to stock picking and generating piles of cash. Not that we don’t do that every week. But this week’s newsletter is focused on one thing.

What stocks am I buying right now and why?

First, a big welcome and thank you to all of the new subscribers that joined this past week. If you enjoy the newsletter be sure to also check out A Trader’s Education Podcast as well. More great info but in audio form!

Now let’s get right to the stock selection and option selling details for the week!

New Buy - Macy’s (M)

I added a full lot (100 shares) of Macy’s stock to the covered call portfolio. If you have been following along you already know why.

But first, if you look at the daily or weekly chart and wonder why anyone would buy here, I think that is actually a fair thought to have.

So let’s break it down starting with the hourly chart. Sometimes you have to zoom in.

The 1-hour chart for M shows clear support near $14.75 with a recent low of $14.48 providing a stop loss level to manage risk.

The support level looks pretty clear to me at $14.75 and I like defining my risk (how much I’m willing to lose) so I set my stop loss at the recent low of $14.48.

This is a tight stop loss but I like it this way for a stock that is in a clear downtrend.

Also note that RSI is at record lows and has been, indicating the stock is oversold which could lead to a bounce.

Another key factor when I’m looking to create cash with a covered call strategy is finding stocks with higher implied volatility (IV). M has this.

Looking back at the chart, you can see IV is well above its historical average. This drives the price of options up and when IV starts to cool back down to normal levels the price of the options will come down (all else being equal).

This allows for selling options to collect a larger premium and then the expectation is the price is negatively impacted by the IV compression after you’ve sold the option.

You might have heard it called the “IV Crush”. Same thing.

To recap why I like M for a covered call strategy:

1. Clear support level defined at 14.75

2. RSI indicates oversold

3. Recent lows provide a clear stop loss

4. High IV creates higher options premiums

M reports earnings on June 1st so that does have an impact on options prices.

I like considering selling either the $16 strike calls expiring May 26th or moving up the strike price to $17 for the calls expiring June 2nd, after earrning.

If the shares pop to the upside on earnings and get called away, meaning they are above $17 dollars and the owner of the call you sold decides to exercise it and takes your shares for $17 each, that’s ok.

In this scenario you profit 17% in just two weeks from the combined sale of shares and the covered call. What a fantastic trade!

Additionally, if the shares drop I have downside protection when you consider the premium collected by selling the calls offsets any losses due to share depreciation.

Selling covered calls really is the best of both worlds when you’re working with high IV stocks like the ones I focus on.

An Old Friend - CPNG

Another stock I like here is Coupang (CPNG). After a massive run to $18 it has cooled off and dropped back below $16 briefly.

The set up and risk management here is again very clear making it a trade I can set up and not think about much at all. Ideal for someone as busy as I am.

The set up for CPNG has risk defined by the 50-day simple moving average (SMA), a buy zone around the $15.91 support level, and profit targets at $17 and $18.

After settling back down, the shares have bounced consistently off of the $15.91 support level for over a week. This sets up the buy zone which I like between $15.75 and $16.05.

The 50-day Simple Moving Average (SMA) provides a nice level of support below which I like using as a stop loss to manage risk.

Selling covered calls at the $17 and $18 strikes allows for upside gains of 6.25% and 12.5% respectively. And that is before considering the premiums for the selling calls.

Call options for CPNG demand a nice premium, allowing for collecting 1-2% quickly.

I like considering selling the $17 strike calls expiring June 2nd to collect about 1.3%.

One additional note for CPNG. The IV is actually relatively low. So instead of selling calls right away, you could consider waiting for a move up to the $16.81 resistance level first. This will add premium to the calls you sell.

Twitter Spaces - Chart Reviews, Trading Strategies

I hope you find this information useful each and every week.

As always I like to remind everyone of the Twitter Space I host weekly to review charts and prepare for the following week of trading.

We discuss strategies, including selling covered calls and cash secured puts, and review charts for a variety of tickers.

Shaun Clarke - @ShaunClarke_ and Kaye @InvestKaye join me to talk strategies for the upcoming week. You don’t want to miss it!

It is a great way to sharpen your chart analyzing skills while hearing about what we are each looking at for possible trades.

Link to this week’s Twitter Space: Sunday Trading Prep

Thank you again for reading and an extra special thank you to those that are pledging $8 every month. You’re clearly high quality individuals with excellent taste and I appreciate you very much.

Have a great week!

Nate