Daily Stock Market Equity and Options Trading Commentary

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Wednesday, December 10, 2008

BGZ Buy the Stock and Sell The Call

Today while the S&P was near 905 I purchased 200 shares of BGZ. BGZ is an inverse ETF that uses 250% leverage to get a 3X opposite move on a large basket of large cap stocks. So for every 1% drop in the basket of large cap stocks, this ETF moves up 3% or so. I purchased 200 at $61 per share, and waited an hour or so before I wrote 2 call contracts for the December 80 strike. I sold both contracts for $391.50 AFTER fees, that means my cost basis for these shares is now $59.05, and I am giving the rights to someone to purchase the shares off of me ( in 10 days) for $80. So if I do get called out I would net over $4000, but if Idon't I will just write them out again for the January expiration and get another whopper of a premium. The reason I am doing this is because by writing the call so far out of the money I am guaranteeing myself a much higher price than I paid for the stock (if I get called out), as well as gives me a little income off my shares and lowers my cost basis. The other good part is- well if this stocks gets trounced that just means 85% of my portfolio is doing great! I will continue to play with these very volatile stocks as long as the VIX (Volatility Index) remains above 30- which I see for the next 6-8 months. This strategy has worked for me well the last 3 months with both BGZ and SDS. If you think that these are too volatile look around thre are many inverse funds out there to be found.

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