Stop And Reverse. Cha-Ching every week!

Someone once told you to buy and hold stock. Great, you did... that but now what? Did you know you can collect rent on your stocks every week while you still own the stock? It's like owning a house and renting it out weekly; it's the original Airbnb! 

Figuring out the market can be tough, and trying to time the market can be even harder, so here is a strategy I personally use to manage my own investments. I am not a financial advisor but this strategy has kept my portfolio stable even during very volatile market corrections.

First, I want to let you know trading without a plan is just gambling, and so is trading without indicators. Arbitrage has a tremendous amount of visual aids to help you stay on top of your positions at all times. The strategy I want to describe to you today requires the original Stop and Reverse Indicator (SAR), or the adapted Arbitrage Stop and Reverse Indicator found on arbitragetrade.com or tradingview.com. When using the regular Stop and Reverse indicator or Arbitrage's version of the Stop and Reverse Indicator to collect premium on covered calls, the key is to align your covered call strategy with the trend signals provided by the SAR. Here's a detailed strategy for when to sell at-the-money (ATM) calls versus out-of-the-money (OTM) calls:

Using the Stop and Reverse (SAR) Indicator:

1. Trend Identification: The Arbitrage SAR indicator is primarily used for identifying trend reversals. When the price is above the SAR, it indicates an uptrend, and when the price is below the SAR, it indicates a downtrend.

2. Covered Calls Strategy:

• At-the-Money (ATM) Calls:

• When to Sell: Consider selling ATM calls when the SAR indicates the price is approaching a potential reversal point (i.e., the SAR dots are closing in on the price from above in an uptrend or below in a downtrend). This typically happens when a trend is losing momentum, and you want to maximize the premium collected while being prepared to sell the stock at the current price.

• Purpose: Selling ATM calls generates higher premium due to the higher option delta but comes with a higher likelihood of the stock being called away. This is ideal when you expect little upside movement or a potential reversal downwards, as indicated by the SAR.

• Out-of-the-Money (OTM) Calls:

• When to Sell: Sell OTM calls when the SAR indicates a strong, ongoing uptrend and the price is comfortably above the SAR dots. This allows you to collect premium while still allowing for some capital appreciation, as the strike price is higher than the current price.

• Purpose: Selling OTM calls generates less premium but allows you to keep the stock and benefit from additional price appreciation up to the strike price. This strategy is suitable when the SAR shows a strong uptrend, and you expect the price to continue moving upward without an immediate reversal.

Additional Considerations:

• Volatility and Premium Levels: If implied volatility is high, premiums will be higher, which may tilt the decision towards selling more OTM calls to capture premium while preserving upside potential.

• Time to Expiration: Closer expirations generally mean higher time decay, which can be advantageous when selling ATM calls. Longer expirations give more time for the stock to move, which might make OTM calls more appealing if expecting a sustained uptrend.

• Risk Tolerance: If your primary goal is income generation and you're less concerned about the stock being called away, ATM calls are more appropriate. If you want to retain the stock for the long term and are willing to sacrifice some premium for upside, OTM calls are better.

Risk Reward: When selling premium at the money make sure to find stocks that offer at least a 1% return per week on their premium. If they do not, you may want to consider finding another stock to use with this strategy.

By using the SAR to time your covered call strategy, you can better align your decisions with market trends, optimizing the balance between income generation and potential upside in your stock positions.