Tuesday, June 2, 2009
Near the Money Option Strategies: The New Dow Edition
As of Monday June 1, 2009 two new Dow components were named. Although I speculated on my blog that I thought it would be either Google (GOOG) or Apple (AAPL) which would replace General Motors (GM), it has been named Cisco (CSCO). Citigroup (C) will also be delisted from the Dow and replaced with Travelers (TRV).
I have decided to write an article which contains the new Dow components (index will change as of market open June 8, 2009), and buy write/option strategies for each component with percentage returns (if the option is exercised), and probabilities (risk neutral probability) of the option expiring above the indicated strike. Below they are listed alphabetically, however if you'd like a spreadsheet which shows the returns from least to greatest check out my blog (for more on trading/understanding options check out my ebook for only $4.99). Note all stocks are near the money unless indicated they are in the money.
All data is as of market close Monday June 1, 2009.
Buy/Write Option Strategy #1: Buy 3M (MMM) stock and sell the June 60 Call option. Assuming you get called away this will return 3.1% in 18 days. 43.2% probability option expires above indicated strike.
Buy/Write Option Strategy #2: Buy Alcoa (AA) stock and sell the June 10 Call option. Assuming you get called away this will return 6.3% in 18 days. 47.2% probability option expires above indicated strike.
Buy/Write Option Strategy #3: Buy American Express (AXP) stock and sell the June 26 Call option. Assuming you get called away this will return 5.8% in 18 days. 54.8% probability option expires above indicated strike.
Buy/Write Option Strategy #4: Buy AT&T (T) stock and sell the June 25 Call option. Assuming you get called away this will return 3.2% in 18 days. 40.4% probability option expires above indicated strike.
Buy/Write Option Strategy #5: Buy Bank of America (BAC) stock and sell the June 11 (in the money) Call option. Assuming you get called away this will return 6% in 18 days. 63.7% probability option expires above indicated strike.
Buy/Write Option Strategy #6: Buy Boeing (BA) stock and sell the June 48 Call option. Assuming you get called away this will return 3.2% in 18 days. 47.2% probability option expires above indicated strike.
Buy/Write Option Strategy #7: Buy Caterpillar (CAT) stock and sell the June 38 Call option. Assuming you get called away this will return 4.9% in 18 days. 47.4% probability option expires above indicated strike.
Buy/Write Option Strategy #8: Buy Chevron (CVX) stock and sell the June 70 Call option. Assuming you get called away this will return 3.1% in 18 days. 43.6% probability option expires above indicated strike.
Buy/Write Option Strategy #9: Buy Cisco (CSCO) stock and sell the June 20 Call option. Assuming you get called away this will return 4.6% in 18 days. 39.1% probability option expires above indicated strike.
Buy/Write Option Strategy #10: Buy CocaCola (KO) stock and sell the June 50 Call option. Assuming you get called away this will return 2.8% in 18 days. 31.9% probability option expires above indicated strike.
Buy/Write Option Strategy #11: Buy DuPont (DD) stock and sell the June 30 Call option. Assuming you get called away this will return 3.5% in 18 days. 48.9% probability option expires above indicated strike.
Buy/Write Option Strategy #12: Buy Exxon Mobil (XOM) stock and sell the June 70 (in the money) call option. Assuming you get called away this will return 1.4% in 18 days. 66.7% probability option expires above indicated strike.
Buy/Write Option Strategy #13: Buy General Electric (GE) stock and sell the June 14 Call option. Assuming you get called away this will return 4.0% in 18 days. 46.8% probability option expires above indicated strike.
Buy/Write Option Strategy #14: Buy Hewlett Packard (HPQ) stock and sell the June 36 Call option. Assuming you get called away this will return 2.6% in 18 days. 51.6% probability option expires above indicated strike.
Buy/Write Option Strategy #15: Buy Home Depot (HD) stock and sell the June 24 Call option. Assuming you get called away this will return 2.7% in 18 days. 54.9% probability option expires above indicated strike.
Buy/Write Option Strategy #16: Buy Intel (INTC) stock and sell the June 17 Call option. Assuming you get called away this will return 3.5% in 18 days. 35.2% probability option expires above indicated strike.
Buy/Write Option Strategy #17: Buy IBM (IBM) stock and sell the June 110 Call option. Assuming you get called away this will return 2.9% in 18 days. 39.1% probability option expires above indicated strike.
Buy/Write Option Strategy #18: Buy Johnson & Johnson (JNJ) stock and sell the June 55 Call option. Assuming you get called away this will return 1.1% in 18 days. 64.3% probability option expires above indicated strike.
Buy/Write Option Strategy #19: Buy JP Morgan (JPM) stock and sell the June 36 Call option. Assuming you get called away this will return 5.9% in 18 days. 58.2% probability option expires above indicated strike.
Buy/Write Option Strategy #20: Buy Kraft (KFT) stock and sell the June 26 Call option. Assuming you get called away this will return 1.0% in 18 days. 66.3% probability option expires above indicated strike.
Buy/Write Option Strategy #21: Buy McDonalds (MCD) stock and sell the June 60 Call option. Assuming you get called away this will return 1.9% in 18 days. 48.2% probability option expires above indicated strike.
Buy/Write Option Strategy #22: Buy Merck (MRK) stock and sell the June 28 Call option. Assuming you get called away this will return 3.0% in 18 days. 36.3% probability option expires above indicated strike.
Buy/Write Option Strategy #23: Buy Microsoft (MSFT) stock and sell the June 22 Call option. Assuming you get called away this will return 4.2% in 18 days. 33.4% probability option expires above indicated strike.
Buy/Write Option Strategy #24: Buy Pfizer (PFE) stock and sell the June 15 (in the money) Call option. Assuming you get called away this will return 3.6% in 18 days. 40.6% probability option expires above indicated strike.
Buy/Write Option Strategy #25: Buy Procter & Gamble (PG) stock and sell the June 52.50 (in the money) Call option. Assuming you get called away this will return 1.4% in 18 days. 62.2% probability option expires above indicated strike.
Buy/Write Option Strategy #26: Buy Travelers (TRV) stock and sell the June 40 (in the money) Call option. Assuming you get called away this will return 1.3% in 18 days. 73.6% probability option expires above indicated strike.
Buy/Write Option Strategy #27: Buy United Technologies (UTX) stock and sell the June 55 (in the money) Call option. Assuming you get called away this will return 2.5% in 18 days.
Buy/Write Option Strategy #28: Buy Verizon (VZ) stock and sell the June 30 Call option. Assuming you get called away this will return 3.8% in 18 days. 32.9% probability option expires above indicated strike.
Buy/Write Option Strategy #29: Buy WalMart (WMT) stock and sell the June 50 (in the money) Call option. Assuming you get called away this will return 1.7% in 18 days. 59.5% probability option expires above indicated strike.
Buy/Write Option Strategy #30: Buy Walt Disney (DIS) stock and sell the June 25 (in the money) Call option. Assuming you get called away this will return 3.5% in 18 days. 52.1% probability option expires above indicated strike.
These options expire in 18 days (June 20, 2009) therefore the last trading day is Friday June 19, 2009. As you can see the higher the probability of expiring above the indicated strike, the lower the premium (this should make sense). In the case the option expires out of the money I just write it out for a similar strike for the next month.
Of these 30 buy/write strategies the ones that look most attractive to me are Bank of America, Caterpillar, Chevron, and General Electric. I am bullish on these names for summer, and 3 out of 4 have higher than average premiums (according to Dow average premiums from spreadsheet) with decent probabilities of expiring in the money (above strike).
There are many more covered call strategies to profit from. If you're more aggressive and want to take on more risk check out the leveraged ETF names such as UYG,SKF, FAS, FAZ, URE,TNA, and URX. These all receive very high premiums even as much as 10% deep in the money.
If you are more bullish/bearish you’ll want to adjust the strike price 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.
For a spreadsheet of these stocks listed in order from least to greatest % returns, and the average return see the blog post below. As you will see from the spreadsheet, the average return for the Dow June expiration is 3.28%. 3 of the 4 names I am bullish on have higher returns than the average (changes day to day).
Sphere: Related Content
I have decided to write an article which contains the new Dow components (index will change as of market open June 8, 2009), and buy write/option strategies for each component with percentage returns (if the option is exercised), and probabilities (risk neutral probability) of the option expiring above the indicated strike. Below they are listed alphabetically, however if you'd like a spreadsheet which shows the returns from least to greatest check out my blog (for more on trading/understanding options check out my ebook for only $4.99). Note all stocks are near the money unless indicated they are in the money.
All data is as of market close Monday June 1, 2009.
Buy/Write Option Strategy #1: Buy 3M (MMM) stock and sell the June 60 Call option. Assuming you get called away this will return 3.1% in 18 days. 43.2% probability option expires above indicated strike.
Buy/Write Option Strategy #2: Buy Alcoa (AA) stock and sell the June 10 Call option. Assuming you get called away this will return 6.3% in 18 days. 47.2% probability option expires above indicated strike.
Buy/Write Option Strategy #3: Buy American Express (AXP) stock and sell the June 26 Call option. Assuming you get called away this will return 5.8% in 18 days. 54.8% probability option expires above indicated strike.
Buy/Write Option Strategy #4: Buy AT&T (T) stock and sell the June 25 Call option. Assuming you get called away this will return 3.2% in 18 days. 40.4% probability option expires above indicated strike.
Buy/Write Option Strategy #5: Buy Bank of America (BAC) stock and sell the June 11 (in the money) Call option. Assuming you get called away this will return 6% in 18 days. 63.7% probability option expires above indicated strike.
Buy/Write Option Strategy #6: Buy Boeing (BA) stock and sell the June 48 Call option. Assuming you get called away this will return 3.2% in 18 days. 47.2% probability option expires above indicated strike.
Buy/Write Option Strategy #7: Buy Caterpillar (CAT) stock and sell the June 38 Call option. Assuming you get called away this will return 4.9% in 18 days. 47.4% probability option expires above indicated strike.
Buy/Write Option Strategy #8: Buy Chevron (CVX) stock and sell the June 70 Call option. Assuming you get called away this will return 3.1% in 18 days. 43.6% probability option expires above indicated strike.
Buy/Write Option Strategy #9: Buy Cisco (CSCO) stock and sell the June 20 Call option. Assuming you get called away this will return 4.6% in 18 days. 39.1% probability option expires above indicated strike.
Buy/Write Option Strategy #10: Buy CocaCola (KO) stock and sell the June 50 Call option. Assuming you get called away this will return 2.8% in 18 days. 31.9% probability option expires above indicated strike.
Buy/Write Option Strategy #11: Buy DuPont (DD) stock and sell the June 30 Call option. Assuming you get called away this will return 3.5% in 18 days. 48.9% probability option expires above indicated strike.
Buy/Write Option Strategy #12: Buy Exxon Mobil (XOM) stock and sell the June 70 (in the money) call option. Assuming you get called away this will return 1.4% in 18 days. 66.7% probability option expires above indicated strike.
Buy/Write Option Strategy #13: Buy General Electric (GE) stock and sell the June 14 Call option. Assuming you get called away this will return 4.0% in 18 days. 46.8% probability option expires above indicated strike.
Buy/Write Option Strategy #14: Buy Hewlett Packard (HPQ) stock and sell the June 36 Call option. Assuming you get called away this will return 2.6% in 18 days. 51.6% probability option expires above indicated strike.
Buy/Write Option Strategy #15: Buy Home Depot (HD) stock and sell the June 24 Call option. Assuming you get called away this will return 2.7% in 18 days. 54.9% probability option expires above indicated strike.
Buy/Write Option Strategy #16: Buy Intel (INTC) stock and sell the June 17 Call option. Assuming you get called away this will return 3.5% in 18 days. 35.2% probability option expires above indicated strike.
Buy/Write Option Strategy #17: Buy IBM (IBM) stock and sell the June 110 Call option. Assuming you get called away this will return 2.9% in 18 days. 39.1% probability option expires above indicated strike.
Buy/Write Option Strategy #18: Buy Johnson & Johnson (JNJ) stock and sell the June 55 Call option. Assuming you get called away this will return 1.1% in 18 days. 64.3% probability option expires above indicated strike.
Buy/Write Option Strategy #19: Buy JP Morgan (JPM) stock and sell the June 36 Call option. Assuming you get called away this will return 5.9% in 18 days. 58.2% probability option expires above indicated strike.
Buy/Write Option Strategy #20: Buy Kraft (KFT) stock and sell the June 26 Call option. Assuming you get called away this will return 1.0% in 18 days. 66.3% probability option expires above indicated strike.
Buy/Write Option Strategy #21: Buy McDonalds (MCD) stock and sell the June 60 Call option. Assuming you get called away this will return 1.9% in 18 days. 48.2% probability option expires above indicated strike.
Buy/Write Option Strategy #22: Buy Merck (MRK) stock and sell the June 28 Call option. Assuming you get called away this will return 3.0% in 18 days. 36.3% probability option expires above indicated strike.
Buy/Write Option Strategy #23: Buy Microsoft (MSFT) stock and sell the June 22 Call option. Assuming you get called away this will return 4.2% in 18 days. 33.4% probability option expires above indicated strike.
Buy/Write Option Strategy #24: Buy Pfizer (PFE) stock and sell the June 15 (in the money) Call option. Assuming you get called away this will return 3.6% in 18 days. 40.6% probability option expires above indicated strike.
Buy/Write Option Strategy #25: Buy Procter & Gamble (PG) stock and sell the June 52.50 (in the money) Call option. Assuming you get called away this will return 1.4% in 18 days. 62.2% probability option expires above indicated strike.
Buy/Write Option Strategy #26: Buy Travelers (TRV) stock and sell the June 40 (in the money) Call option. Assuming you get called away this will return 1.3% in 18 days. 73.6% probability option expires above indicated strike.
Buy/Write Option Strategy #27: Buy United Technologies (UTX) stock and sell the June 55 (in the money) Call option. Assuming you get called away this will return 2.5% in 18 days.
Buy/Write Option Strategy #28: Buy Verizon (VZ) stock and sell the June 30 Call option. Assuming you get called away this will return 3.8% in 18 days. 32.9% probability option expires above indicated strike.
Buy/Write Option Strategy #29: Buy WalMart (WMT) stock and sell the June 50 (in the money) Call option. Assuming you get called away this will return 1.7% in 18 days. 59.5% probability option expires above indicated strike.
Buy/Write Option Strategy #30: Buy Walt Disney (DIS) stock and sell the June 25 (in the money) Call option. Assuming you get called away this will return 3.5% in 18 days. 52.1% probability option expires above indicated strike.
These options expire in 18 days (June 20, 2009) therefore the last trading day is Friday June 19, 2009. As you can see the higher the probability of expiring above the indicated strike, the lower the premium (this should make sense). In the case the option expires out of the money I just write it out for a similar strike for the next month.
Of these 30 buy/write strategies the ones that look most attractive to me are Bank of America, Caterpillar, Chevron, and General Electric. I am bullish on these names for summer, and 3 out of 4 have higher than average premiums (according to Dow average premiums from spreadsheet) with decent probabilities of expiring in the money (above strike).
There are many more covered call strategies to profit from. If you're more aggressive and want to take on more risk check out the leveraged ETF names such as UYG,SKF, FAS, FAZ, URE,TNA, and URX. These all receive very high premiums even as much as 10% deep in the money.
If you are more bullish/bearish you’ll want to adjust the strike price 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.
For a spreadsheet of these stocks listed in order from least to greatest % returns, and the average return see the blog post below. As you will see from the spreadsheet, the average return for the Dow June expiration is 3.28%. 3 of the 4 names I am bullish on have higher returns than the average (changes day to day).
Sphere: Related Content
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4 comments:
Where do you get your probability of expiring inthemoney? Is it your judgement or a useless quantity such as a riskneutral probability?
Hey thanks for the comment! Options probability is derived from the BlackScholes option pricing model. Although a rather complicated calculation, once you get it down is simple. However most brokerages have probabilities available either with an options calculator or something called a "delta" value.
I can imagine you don't like being challenged about this, but representing a riskneutral probability as a realworld probability is serious misrepresentation in my book...
I agree, as these probabilities change so frequently. Too much emphasis should never be placed on one variable whether it is underlying stock price or option Delta, etc...
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