An Adjustment to the Cash Covered Put Strategy

Once again, if it looks like a debt ceiling deal will be made, the market goes higher. When the Tea Party acts like petulant, spoiled children, the market goes lower. There is collective wisdom in the stock market.

However, today I want to talk about a way to hedge yesterday's cash covered put sale. If you recall, the trade is selling the January 34 put in AT%T (T) for $!. If assigned, you own T at a net price of 33 which offers a very nice dividend yield of 5.45%. And, if not assigned, you collect the premium.

Here is a hedge, or variation. At the same time, you can buy the April 30 put at .50 and sell the April 35 call at 1.

If assigned on the January put you are now long stock but with a nice April Collar around it (long OTM put, short OTM call). And, if not assigned, you buy back the April call with the money you made on the expired January put and are left with a cash covered short April put.

You can keep doing this strategy all year long. And T is a great stock for it. Not too volatile and it has a 28 year stretch of raising its dividend.

If you find any of this particularly complicated, please do not hesitate to contact me with any questions.