Buy/ Write Option Ideas: Financials in the Money Edition

Today I will be writing about 15 Financial stocks/ETF’s that I will be (for those I do not currently own) buying the stock on and immediately writing covered calls in the money. All of the strategies 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). To learn more about opening, closing, and trading these strategies check out my E-Books.

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 68.16% 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 15 cents or 1.22%).





I believe financials will continue to consolidate until fall of the year. Historically stocks do not have too much action during the summer months. I have outlined the buy/write strategies below (stocks ranked alphabetically by ticker, ETF’s ranked by volatility). All data as of market close June 11, 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 10.3%. If your position in American Express gets called out, this will return a total of 4% in 36 days.

Option Strategy #2: Buy Bank of America (BAC) stock and sell the July 12 Call option. This will give you downside protection of 11.8%. If your position in Bank of America gets called out, this will return a total of 4.3% in 36 days.

Option Strategy #3: Buy BB&T (BBT) stock and sell the July 21 Call option. This will give you downside protection of 10.6%. If your position in BB&T gets called out, this will return a total of 3.7% in 36 days.

Option Strategy #4: Buy Bank of NY Mellon (BK) stock and sell the July 27 Call option. This will give you downside protection of 10.5%. If your position in Bank of NY Mellon gets called out, this will return a total of 3.8% in 36 days.

Option Strategy #5: Buy Capital One (COF) stock and sell the July 24 Call option. This will give you downside protection of 10.4%. If your position in Capital One gets called out, this will return a total of 8% in 36 days.

Option Strategy #6: Buy Fifth Third (FITB) stock and sell the July 7 Call option. This will give you downside protection of 14.8%. If your position in Fifth Third gets called out, this will return a total of 4.9% in 36 days.

Option Strategy #7: Buy Goldman Sachs (GS) stock and sell the July 135 Call option. This will give you downside protection of 10%. If your position in Goldman Sachs gets called out, this will return a total of 3% in 36 days.

Option Strategy #8: Buy HSBC (HBC) stock and sell the July 42 Call option. This will give you downside protection of 10%. If your position in HSBC gets called out, this will return a total of 3.2% in 36 days.

Option Strategy #9: Buy JPM Morgan (JPM) stock and sell the July 33 Call option. This will give you downside protection of 10%. If your position in JP Morgan gets called out, this will return a total of 4.4% in 36 days.

Option Strategy #10: Buy Morgan Stanley (MS) stock and sell the July 28 Call option. This will give you downside protection of 10.2%. If your position in Morgan Stanley gets called out, this will return a total of 5.1% in 36 days.

Option Strategy #11: Buy PNC Financial (PNC) stock and sell the July 41 Call option. This will give you downside protection of 10%. If your position in PNC gets called out, this will return a total of 6.5% in 36 days.

Option Strategy #12: Buy Wells Fargo (WFC) stock and sell the July 23 Call option. This will give you downside protection of 12.2%. If your position in Wells Fargo gets called out, this will return a total of 4.1% in 36 days.

Financial ETF’s in the Money

Option Strategy #13: Buy the Financial Select Sector SPDR (XLF) ETF and sell the September 12 Call option. This will give you downside protection of 10.5%. If your position in the XLF gets called out, this will return a total of 7.2% in 99 days (I don’t like writing options or holding positions in any volatile sector more than 50 days, so I’ll most likely write the XLF out for a strike above the current share price).

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 11.8%. If your position in the UYG gets called out, this will return a total of 6.6% in 36 days.

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 15.4%. If your position in the FAS gets called out, this will return a total of 11.5% in 36 days.

These options expire on July 18, 2009 (excluding the XLF, that expires September 19, 2009) therefore the last trading day is Friday July 17, 2009. As you can see the less volatile the underlying stock 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. However I may decide to write some of my FAS out for the July 9 and July 11 as well. For other strategies like these subscribe to my blog.


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