Profitable Stock Trading

Profitable stock trading starts with getting into a position at the right price. That means being diligent in your valuation of the company and disciplined in your entry price. Getting into our first tranche of a company at our on sale price will help get us into a profitable position on the company more quickly. Let’s walk through how that works.  

A company we like right now is Builders FirstSource. We opened a position in BLDR earlier this month and we currently own 100 shares. We bought 100 shares at $107.99 back on 6/3. Now we’ll use option contracts to help with profitable stock trading. The option premium helps with cash flow and also reduces our cost basis on our shares. So that same day we sold to open a cash secured put option at the $105 strike for the 6/20 expiration date. That put option brought in $2.92 per share, or $292, for our promise to buy 100 shares of BLDR on or before the 6/20 expiration date. That brought our basis from $107.99 per share down to $105.07. That put option contract expired worthless out of the money on Friday, 6/20. Here is the post that walks through how we opened that trade.  

When it became evident that our put would expire out of the money we sold to open a new put for the 7/18 expiration date. That put is also for the $105 strike and we brought in $3.41 in passive income with that trade. Earlier this week BLDR ran up as high as $120.75. Now it’s pulled back to the $116.17 it’s trading at right now. When we sold to open that contract our annualized return for the duration of the one month long trade was 38.9%. We get that by dividing the option premium into the strike price, then multiplying that by the number of times in a year could do the trade. This trade was one month long, so our time multiplier was 12. We divide the premium of $3.41 into the $105 strike and we get 0.32, then we multiply that by 12 and we get 0.389.

Since BLDR ran up the premium for the $105 strike is now much lower at $1.35. So let’s see how much of an annualized return we’ll get if we continue to hold this trade. There are 23 days left on the trade, so we divide the 365 days in a year by 23 and we get 15.9. That’s our time multiplier. Then we divide the remaining premium of $1.35 into the $105 strike price and we get 0.013. Then we multiply that by our 15.9 time multiplier and we get 0.204. That’s an annualized return of 20.4%. That’s ok, but not great. We currently own just 100 shares of BLDR in this portfolio, and we’d like to add to our position. We have a total of about $60,000 we’re willing to put toward BLDR, and right now we only have one tranche. That leaves room for five more tranches.   

We can sell the $110 put for $2.40, and that trade is for the same time period with the 7/18 expiration date. So we divide the $2.40 into $110 and we get 0.218, then we multiply that by 15.9 and we get 0.347. That’s an annualized return of 34.7%. That’s a better annualized return and it also puts us a little closer to the money. In this case we’re ok with that because we’d like to get another tranche here. A big part of profitable stock trading is how we can generate cash flow from a company while we establish a position. In this case we’re using the option premium to reduce our basis in the shares we own.

If the trading price of BLDR drops below our $110 strike price we’ll take the shares. Then we’ll sell another put at a lower strike to generate more cash flow. We’ll also be able to sell a covered call at the $110 strike where we will be assigned shares. Then we’ll have a cash secured put option below the trading price and a covered call above the trading price. If we have 200 shares we’ll only sell one covered call to be sure we’ll continue to own shares if the trading price rises up through our call strike. Generating cash flow on both sides of the trade will help us reduce our basis more quickly. This profitable stock trading strategy will also give us cash flow as we wait for the trading price to increase.

Stock Trade Recap

We closed our $105 put for the 7/18 expiration date for a profit of $2.06 per share. Then we opened a new cash secured put option at the $110 strike for $2.40 in premium. That put option is also for the 7/18 expiration date. These trades bring our basis down from the $107.99 purchase price per share to $100.61 per share. Now we’re in a position to add another 100 shares at $110 on 7/18 if the trading price falters. If not, we’ll sell another put option to generate more option premium as part of our profitable stock trading strategy.