Some of you have read elsewhere about DUCks—or Dip-pingUndervaluedCalls. This is when a company, usually after a split, that has been climbing, pulls back temporarily as investors take their profits. The company is solid and growing, but the stock dips 5-10% for no reason other than profit taking. Around our office, we have a word for this. We call it a “SALE.” The price of the stock and also of the options, has just dropped below value. It is a perfect buy opportunity.
Obviously, any buy opportunity or any rising stock also presents a great opportunity to sell a put. If the stock turns and rises (as it should) you keep the premium and that’s it.
Of course, you want to pick the stock near the bottom of the dip and sell the put for the very next expiration date. And the strike price should be very near the stock price.
That way, if you’re wrong and the stock gets put to you (you are required to buy it), you get it at the sale price where it can rise. And when you buy a rising stock, you can easily sell later at a profit, sell calls, or just hold it. So a DUCk really presents a great opportunity to enhance your cash flow.
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