Sell These 2 Overvalued Stocks

But option traders strive to avoid the unlimited risk inherent in shorting stock. I suggest the following short strategy for CTSH via options:

Sell 2 Oct $55 put

Buy 3 Oct $52.50 put

This is called a ratio spread. We open the position at a net credit of roughly $20. The sold puts finance the bought puts with some money left over for us to pocket.

Because we are holding more long puts than short puts, we not only gain 100% upside for when CTSH falls but we are also long vega, meaning that volatility increases make this strategy more profitable. We are also theta hedged here, so we don’t need to worry about time decay. In the end, this is a strategy that pays off handsomely if CTSH is corrected by the market and exposes us to no risk if CTSH continues upward despite the mispricing.

I hope that the above strategies have taught you a bit about the versatility of options. Try looking for mispriced equities using GN yourself, and you just might be surprised at the amount of mispricing in the market. The above options strategies can be applied to virtually any stock, so long as the stock has liquid options.

Using options to short overvalued stocks has made me a bunch of money, but if that isn’t a strategy that you are comfortable with, check out what my colleague Tim Plaehn is doing with dividend stocks.

He makes it a habit of only hunting down and recommending stable companies that regularly increase their dividends, and this is the strategy that he uses most often to produce superior results, no matter if the market moves up or down in the shorter term. The combination of a high yield and regular dividend growth is what has given him the most consistent gains out of any strategy that ha has tried over his decades-long investing career.

And, there are currently over twenty of these stocks to choose from in his Monthly Paycheck Dividend Calendar, an income system used by thousands of dividend investors enjoying a steady stream of cash.

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