15 Buy Write Option Ideas UPdate: Financials in the Money Edition & Spreadhseet

As recently posted on my blog, I believe financials are due for a consolidation period. The financials have demonstrated a tremendous upside move over the past 3 months (the least volatile of this list, the Financial Select Sector SPDR (XLF) is higher by 69.24% since March 12, 2009 - first Google chart). However as we can see from the second chart of the XLF below, it looks as if the financials have moved sideways in the past month (XLF higher by 23 cents or 1.88%) (Click charts to enlarge).


Today I will be writing about 15 Financial stocks/ETF’s that I have been using to create some cash flow over the past 3 months. The strategy used in this article is the buy/write option strategy. All of the ideas outlined in this article have been researched and set so they will give me at least 10% downside protection and return at least 3% by July expiration (excluding strategy #13, and assuming the option expires in the money), and all have Delta greater than .60 (risk neutral probability of expiring in the money according to current options market). To learn more about opening, closing, trading, and calculating these strategies check out my option E-Books.

I believe financials will continue to consolidate until fall of the year. Major reasons include: I expect the overall market to move sideways in the months ahead and the fact that historically stocks do not experience great gains during the summer months. I have outlined the buy/write ideas below (stocks are ranked alphabetically by ticker, ETF’s ranked by volatility). All data as of pre-market June 15, 2009.

Financial Stocks in the Money

Option Strategy #1: Buy American Express (AXP) stock and sell the July 24 Call option. This will give you downside protection of 13.3%. The current options market is factoring in a 75.9% chance American Express will be above the indicated strike at July options expiration yielding a 3% return.

Option Strategy #2: Buy Bank of America (BAC) stock and sell the July 13 Call option. This will give you downside protection of 10.7%. The current options market is factoring in a 64.7% chance Bank of America will be above the indicated strike at July options expiration yielding a 5.5% return.

Option Strategy #3: Buy BB&T (BBT) stock and sell the July 21 Call option. This will give you downside protection of 11.9%. The current options market is factoring in a 72.4% chance BB&T will be above the indicated strike at July options expiration yielding a 2.6% return.

Option Strategy #4: Buy Bank of NY Mellon (BK) stock and sell the July 27 Call option. This will give you downside protection of 10.4%. The current options market is factoring in a 65.9% chance Bank of New York Mellon will be above the indicated strike at July options expiration yielding a 3.5% return.

Option Strategy #5: Buy Capital One (COF) stock and sell the July 23 Call option. This will give you downside protection of 10.9%. The current options market is factoring in a 61.6% chance Capital One will be above the indicated strike at July options expiration yielding a 6.9% return.

Option Strategy #6: Buy Fifth Third (FITB) stock and sell the July 7 Call option. This will give you downside protection of 15.8%. The current options market is factoring in a 77.1% chance Fifth Third will be above the indicated strike at July options expiration yielding a 3% return.

Option Strategy #7: Buy Goldman Sachs (GS) stock and sell the July 135 Call option. This will give you downside protection of 10%. The current options market is factoring in a 71% chance Goldman Sachs will be above the indicated strike at July options expiration yielding a 2.5% return.

Option Strategy #8: Buy HSBC (HBC) stock and sell the July 41 Call option. This will give you downside protection of 11.2%. The current options market is factoring in a 75% chance HSBC will be above the indicated strike at July options expiration yielding a 1.7% return.

Option Strategy #9: Buy JPM Morgan (JPM) stock and sell the July 33 Call option. This will give you downside protection of 10%. The current options market is factoring in a 67.9% chance JP Morgan will be above the indicated strike at July options expiration yielding a 3.9% return.

Option Strategy #10: Buy Morgan Stanley (MS) stock and sell the July 28 Call option. This will give you downside protection of 10.1%. The current options market is factoring in a 75.9% chance Morgan Stanley will be above the indicated strike at July options expiration yielding a 4.4% return.

Option Strategy #11: Buy PNC Financial (PNC) stock and sell the July 39 Call option. This will give you downside protection of 11.1%. The current options market is factoring in a 65.4% chance PNC Financial will be above the indicated strike at July options expiration yielding a 5.5% return.

Option Strategy #12: Buy Wells Fargo (WFC) stock and sell the July 24 Call option. This will give you downside protection of 10.3%. The current options market is factoring in a 64% chance Wells Fargo will be above the indicated strike at July options expiration yielding a 4.5% return.

Financial ETF’s in the Money

Option Strategy #13: Buy the Financial Select Sector SPDR (XLF) ETF and sell the July 11 Call option. This will give you downside protection of 13.1%. The current options market is factoring in an 81% chance the XLF will be above the indicated strike at July options expiration yielding a 1.2% return. To get a better return look at the September 12 Call on the XLF if you’re comfortable locking up shares for that long.

Option Strategy #14: Buy the Proshares Ultra Financials (2X leveraged ETF) (UYG) ETF and sell the July 4 Call option. This will give you downside protection of 11%. The current options market is factoring in a 66.4% chance the XLF will be above the indicated strike at July options expiration yielding a 4.4% return.

Option Strategy #15: Buy the Direxion Daily Financial Bull (3X leveraged ETF) (FAS) ETF and sell the July 10 Call option. This will give you downside protection of 15.5%. The current options market is factoring in a 62.8% chance the FAS will be above the indicated strike at July options expiration yielding a 10.2% return.

These options expire on July 18; therefore the last trading day is Friday July 17, 2009. As you can see the less volatile the underlying stock and greater chance (higher delta current risk neutral probability of expiring above indicated strike price), the less the return % by expiration is. In the case the option expires out of the money (dead) I just write it out for a similar strike for the following month.

If you are more bullish/bearish you’ll want to adjust the strike price and expiration accordingly. If you’re more bearish write deeper in the money calls, you will not return as much if you get called out, but if you do, and the overall market is down you’ll most likely outperform the market.

Out of these 15 strategies, the strategy which appeals most to me is the FAS July 10. This is because the return is more than double the average of these 15 listed in this article, and the current risk neutral probability of expiring above the indicated strike is average. However I am a more risky investor. I don't recommend these leveraged ETF's for investing, but they make great trading vehicles and have allowed me to "bank" massive gains on the financial sector during this recent bullish trend. However I may decide to write some of my FAS out for the July 9 and July 11 as well.

Here is a spreadsheet of 15 financial stocks ranked in order from least to greatest % return for the July options expiration if Buy/Write option strategy was used as of Friday June 12, 2009 Market close. (To print click image to enlarge)




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