Consider the following possible strategy. Begin by creating a list of symbols that if stuck owning shares of that symbol, its not overly concerning. After creating the list of symbols, determine the purchase price target of each symbol based on various important criteria (such as P/E, dividend yield, price history, etc).
Now with a symbol list and price targets established, review PUT option prices on strikes that are at or below each price targets that expire in the next 1 - 8 weeks for each symbol.
There are two possible outcomes when selling a PUT contract:
The first case is the preferred outcome because the process can be repeated again while still keeping your full investment in cash as well as the premium collected from the sale of the put contract.
The second case is less ideal because now shares of the symbol were purchased above the current price and the market price could continue to drop. This is why it is important to sell PUT contracts ONLY on quality companies (symbols) at a good price. Some individuals like companies that have a good dividend history and dividend yield because that usually helps prevent the stock from dropping too far. Worst case simply hold the stock and collect the dividends. One thing to remember is that when owning shares of stock, an account immediately loses money for every penny the stock drops. However, when selling a PUT option contract, the stock has to first drop to the strike price before losing money. As a result, if getting assigned a PUT contract and required to purchase 100 shares, consider aggressively looking to sell a CALL contract at the same strike the stock was purchased and hopefully get the shares called away as soon as possible to prevent it from having a chance to produce further losses. Furthermore, look to sell a call IMMEDIATELY to collect some premium to help reduce further downside risk. Once able to get the shares called away via a CALL option, go back to selling a PUT contract. Notice this is a circular process and is commonly called "The Wheel Strategy".
After learning the basics of put and call options, most people realize the input of one is the output of the other. As a result, the two option types can be used together in a simple continuous cycle, referred to as "The Wheel".
Option Alpha did a podcast discussing this strategy.
This is a great strategy because it is simple and forces the successful investment principle of buying low (selling a put)
and selling high (selling a call).
1) Double Dividends Stocks
2) Richard Berger
3) Option Alpha - Wheel Strategy
4) Option Alpha - Interview with Cameron Skinner