In a previous
OptionMaestro.com
post, I outlined 25 stocks which I wouldn't mind going long at these
levels. I wrote about getting long the stocks by using the buy-write
option strategy. This is an updated post to that one, adjusting the
strikes and prices accordingly for options expiration today. It is very
important to write the shares out as early as possible as volatility
rushes into the market in the morning, and not wait for it to start
decreasing rapidly in the afternoon. It's not too late to get premium
out of many of these stocks, and writing them for just a day decreases
risk greatly. I will look to be purchasing some of the stocks mentioned
below pre-market to write out at opening bell. As I've stated, I don't
mind holding any of these stocks long which is why I'll be using this
strategy tomorrow. If I get called out I won't mind because I'll still
make money. Below is the list of stocks, the potential return if
exercised, and protection if they do not get exercised. To learn more
about the buy/write option strategy, risks, pricing, calculations,
other strategies, and options in general, click
here.
Note
that higher beta securities return higher percentages due to their
levels of implied volatility, and because they are riskier.
To understand the table, I will give a detailed example of STEC Inc. (
STEC) below.
Sell
the in-the-money STEC October 25 strike call option. The premium
received from the call option would give a downside protection of
1.87%. If the stock is assigned at options expiration on October 17,
2009 the total return from this position would be 1.15% in 1 trading
day.
| Company |
Ticker |
Strike |
Potential Return % |
Protection % |
| Brocade |
BRCD |
10 |
5.33 |
0.84 |
| STEC |
STEC |
25 |
1.15 |
1.87 |
| Palm |
PALM |
17 |
4.13 |
0.79 |
| First Solar |
FSLR |
155 |
2.38 |
0.92 |
| MasterCard |
MA |
230 |
2.24 |
0.18 |
| Google |
GOOG |
530 |
2.09 |
2.08 |
| Las Vegas Sands |
LVS |
17 |
2.07 |
1.65 |
| Walter Energy |
WLT |
65 |
2.07 |
1.09 |
| Goldcorp |
GG |
42.5 |
1.74 |
0.52 |
| Bank of America |
BAC |
18 |
1.71 |
2.27 |
| Dendreon |
DNDN |
30 |
1.50 |
1.20 |
| Baidu |
BIDU |
400 |
1.41 |
1.39 |
| Rambus |
RMBS |
19 |
1.37 |
1.47 |
| Potash |
POT |
95 |
1.28 |
0.42 |
| Baxter |
BAX |
55 |
1.28 |
0.37 |
| Caterpillar |
CAT |
55 |
1.11 |
0.69 |
| Dow Chemical |
DOW |
27 |
1.11 |
1.11 |
| Goldman Sachs |
GS |
190 |
1.07 |
0.34 |
| A123 Systems |
AONE |
22.5 |
1.04 |
3.47 |
| Visa |
V |
75 |
0.63 |
0.73 |
| Amazon |
AMZN |
95 |
0.62 |
1.68 |
| Textron |
TXT |
20 |
0.54 |
2.21 |
| Apple |
AAPL |
190 |
0.39 |
0.69 |
| Buffalo Wild Wings |
BWLD |
40 |
0.33 |
5.23 |
| Charles Schwab |
SCHW |
18 |
0.22 |
2.18 |
Individual
stocks may not return as much as some of the double and triple
leveraged ETF's. For example If I was bullish on the financial sector,
I may not mind holding the Direxion Daily 3X Bull (FAS) (short-term of
course as these shares don't make good investment vehicles), I would
choose to purchase the stock pre-market and write out call options at
open. If I was more bearish on the financials I may look at purchasing
the Direxion Daily 3X Bear (FAZ) and write at-the-money calls out on
it. For an example, we'll assume the FAS opens today at the close price
Thursday. Therefore I would look to purchase shares at around 92
pre-market and write calls for the 92. As of Thursday's close this
position would yield 2.00% and would protect my shares to the downside
1.96%. Be sure to check out other shares of Direxion ETF's for similar
strategy such as: TNA, TZA, BGU, BGZ, ERX, ERY
To better
understand options in general, including this strategy, these
percentage calculations, and other option strategies click here.
As a shareholder of Bank of America, Brocade, Dendreon, Las Vegas
Sands, Palm, and Visa I've written them out for a variety of strikes
for the October options expiration, as the volatility of the underlying
stock gives a very nice premium, even on out of the money options.
The
list above are stocks which I wouldn't mind holding in my portfolio if
they did not get exercised at expiration. These are just examples and
are not recommendations to buy or sell any security; if you're more
bullish/bearish, you'll want to adjust the strike price and expiration
accordingly.
This is an ideal strategy to open long positions
when the market has rallied as much as it has. This strategy will give
protection if the market sells off, as well as provide a return if the
market continues to rally. If the stock is not assigned, this strategy
is a great way to create additional income for your portfolio. The
reason option volumes have surged in the last 5 years is because they
are a great way to hedge your portfolio as well as create income off of
your shares (see chart here). Keep in mind when using this strategy it is essential that broker commissions are low enough to profit from the position.
Disclosure:
Long BAC, BRCD, DNDN, GOOG March 250 Call Options, LVS, PALM October 14
Call Options, V, Short BAC October 18 & 19 Call Options, BRCD 9
& 10 Call Options, DNDN October 28 & 29 Call Options, GOOG
March 560 Call Options, LVS October 18 & 20 Call Options
