Goodbye MSFT (Maybe) and Hello TREX Dear Savio, Building materials stocks have been on a radar for a while, but we didn't want to add too much from that side of the economy until we had the last Fed report and the election out of the way. At this point, we don't expect any slowing in the housing market until the second quarter of 2021 at the soonest, and that makes this a good time to open a little exposure for some short-term income. We want to be careful and be picky about our stock selection and strike price. The issue is that some housing data dipped slightly on a month-over-month basis in December. For example, pending home sales were down this month for the third month in a row. That has introduced a little uncertainty into the sector and housing stocks are dipping towards support. Building permits, housing starts and our analysis of order closing data from the title insurance companies suggests that existing home sales, refinancing, and equity loans are blasting through last year's numbers and still rising on a month-over-month basis. So, we feel this is a good opportunity to open a bullish position on a dip while traders are over-selling the news about pending home sales. In this case, we are focused on Trex Company (TREX) because it is less likely to be affected by sentiment around pending sales. We like the stock from a technical perspective as well. Support at $81 is strong and should keep the price above our strike. 
However, this recommendation is slightly different in two ways from our usual position. Option prices are fairly high, so we recommend a sooner expiration date to maximize our income-per-day. We're targeting the Jan. 15 puts. Second, because TREX is a fairly lightly traded stock, we strongly recommend using a limit order for the entry at an aggressive price. That may mean we have to be patient for the order to be filled. We recommend you… 'Sell to open' the TREX January 15th $80 Put Write (TREX210115P00080000) for a minimum price of $1.15. Here's How the Trade Can Work Out…
Instant income: With this put sell, we plan to collect an instant income payment of at least $115 per contract.
Put expires out of the money: If TREX's stock price remains above our $80 strike price at expiration on Jan. 15, the puts will expire worthless, allowing us to keep the $115 per contract we receive for selling this option. That's a return of 8.23% in just 15 days, or an annualized return of 585.82%.
Put expires in the money: If TREX's stock price is below our strike price at expiration, you will be "put" 100 shares of TREX at a cost basis of $78.85 ($80.00 strike price – $1.15 option premium). That's a discount of 6.10% below the current market price.
Taking possession of the shares will then allow us to write covered calls against the stock for additional income.
If you do not want to take possession of the stock, you will need to "buy back to close" the put before expiration on Jan. 15.
We'll keep you posted as the trade progresses. | Trex Company (TREX) common stock was trading for approximately $83.98 per share at the time of this alert. Microsoft (MSFT) is the position we have been managing the longest. It has been an extremely reliable income stock and today we recommend allowing our most recent short calls to be exercised if the stock closes above $220 per share. That will allow us to keep 100% of the premium we were originally paid, and the stock will be called away from the portfolio above our original entry price. If we add up the premiums from all the calls we have sold since we took procession of the stock in September, have done very well and will probably look for a new entry in the short term. This is a good stock, so we recommend leaving it in your watchlist if it is called out. We expect the current channel to hold in the short term so another opportunity sell short puts on a dip is very likely. 
So, with MSFT near our strike price, we recommend you… Allow the MSFT December 31st $220 Covered Call (MSFT201231C00220000) to expire at the close. So what happens now? If the call option we sold expires in the money – the stock price might be above our strike price at the close of the market – then the stock will be called away for $220 per share. This means that 100 shares of MSFT for every call contract we sold will be called away from us at $220 per share during the weekend. In other words, the call option buyer will buy our shares of MSFT from us, and we will receive $220 for each of those shares. If this happens, we will no longer own the stock, we still get to keep the entire premium we received when "selling to open" the calls. Plus, we can now start selling put writes against MSFT again if we want to continue generating instant income off of the stock. NOTE: If you do not want your shares of MSFT to be called away from you, you will need to exit this trade before the closing bell by "buying to close" the MSFT December 31st $220 calls. If the call option doesn't expire in the money, we will get to hold on to our stock, and we will look for opportunities to earn more income from MSFT in the future. Long-Term Focused Strategic Positions: Right now, we only recommend selling the following covered calls or puts if you are already holding a long or short position in the underlying stock. We are not recommending our stock positions for new entries at this time. If you haven't already entered the following and can still get in for a price at, or better than, our recommended minimum/maximum, we still recommend entering: - Covered Call: (Short) MSFT December 31st $220 Covered Call (MSFT201231C00220000) for a minimum of $2.75.
- Put Write: (Short) BAC January 22nd $29 Put Write (BAC210122P00029000) for a minimum of $0.50.
- Put Write: (Short) BLL January 15th $87.50 Put Write (BLL210115P00087500) for a minimum of $1.30.
- Put Write: (Short) DIS January 15th $165 Put Write (DIS210115P00165000) for a minimum of $2.05.
- Put Write: (Short) NKE January 22nd $140 Put Write (NKE210122P00140000) for a minimum of $3.00.
- Put Write: (Short) TGT January 15th $170 Put Write (TGT210115P00170000) for a minimum of $1.75.
We are still holding the following strategic trades, but either the current value of the short option or the price action of the stock itself doesn’t warrant entering a new trade at this time. If you haven’t already entered these trades, we recommend waiting until further notice before opening a new position: - Covered Stock: Microsoft (MSFT) common stock -- part of the MSFT covered call position.
If put-writes and buy-writes are new strategies for you, be sure to check out our Resources page for more information. For more on these trades, be sure to attend our next weekly webinar Wednesday, Jan. 6, 2021 at 8 p.m. ET. Sincerely, 
John Jagerson and Wade Hansen
Editors, Strategic Trader
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