To understand this post, you'll need a general understanding of stock options. To learn more about options and, how options can help protect your portfolio, and allow you to speculate with less money up front; check out my book here.
In this post I'll write about 25 popular stocks and give an example of the income generated from selling a call option on the stock, and the return (assuming the stock was purchased as of close Friday and assigned at expiration).
The first step is to decide which price you're willing to sell the stock for. To keep things simple, I aimed at getting near a 5% return from Friday's closing price. However it wouldn't have been worth writing out of the money option calls on some of the less volatile stocks, as the premiums are so low commissions would eat into them greatly.
The first stock in the table below is Amazon (AMZN) to understand how to read the table I will give a worded example using Amazon. The example assumes the stock was being purchased and immediately written out for the August options expiration.
All data as of Friday July 24, 2009.
Purchase Amazon (AMZN) stock, and sell the August 90 strike call option. This would give you $215 per option contract or a downside protection of 2.49%. If the stock is assigned at options expiration on August 22, 2009 the total return from this position would be 6.54%
|Company||Symbol||Strike||Protection %||Return %|
|Bank of America Corporation||BAC||13||3.76||7.67|
|Burlington Northern Santa Fe Corporation||BNI||80||2.66||4.07|
|Cisco Systems, Inc.||CSCO||23||1.65||6.76|
|Exxon Mobil Corporation||XOM||75||0.86||4.61|
|Goldman Sachs Group, Inc.||GS||175||1.86||8.10|
|International Business Machines Corp.||IBM||120||1.28||3.28|
|Johnson & Johnson||JNJ||65||0.29||5.97|
|JPMorgan Chase & Co.||JPM||40||1.71||7.20|
|Research In Motion Limited (USA)||RIMM||80||2.30||7.03|
|The Home Depot, Inc.||HD||26||2.33||5.02|
|Verizon Communications Inc.||VZ||33||0.89||5.65|
|Wells Fargo & Company||WFC||25||2.77||9.29|
All of these options expire on August 22; therefore the last trading day is Friday, August 21, 2009.
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 strategy is a great way to create additional income for your portfolio. The reason option volumes have exploded over the past 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.
For your convenience, I have a printable spreadsheet, which ranks the stocks in this analysis in order from least to greatest return % at the bottom of this post.
To learn more about selling puts and other option strategies check out my option trading books.(Click image to enlarge)
Sphere: Related Content