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Tuesday, July 14, 2009

ProTech't 15 Popular Tech Stocks with In the Money Option Strategies

With the July options expiration coming to an end this Friday, I decided it's time to look ahead for to the August options expiration. I will be analyzing 15 popular technology stocks and seeing which stock offers the best mix of both return (assuming the stock will be called out at the August expiration) and downside "ProTECHtion", I will then decide which stock is the "best bang for your buck". This is one of my more conservative option strategies. I think it's a good time for this analysis, as I am still anticipating a market pull back, as stated here.

To understand this post you'll need to have the knowledge of options. If you don't understand options and would like to learn more about them, like how they can be used for portfolio protection or a cheaper way to speculate, and more click here.

For this analysis I've decided to choose a strike price at least 7% in the money for each stock (the highest strike price which is lower than the current share price discounted 7%).

All data is as of market close Tuesday July 14, 2009.

Option Strategy #1: Buy Amazon (AMZN) stock and sell the August 75 Call option. This will give you downside protection of 11.26%. The current options market is factoring in a 72.9% probability Amazon will be above the indicated strike at August options expiration yielding a 2.78% return.

Option Strategy #2: Buy Apple (AAPL) stock and sell the August 130 Call option. This will give you downside protection of 10.40%. The current options market is factoring in a 78.4% probability Apple will be above the indicated strike at August options expiration yielding a 1.78% return.

Option Strategy #3: Buy AT&T (T) stock and sell the August 21 Call option. This will give you downside protection of 11.22%. The current options market is factoring in an 82% probability AT&T will be above the indicated strike at August options expiration yielding a 0.77% return.

Option Strategy #4:
Buy Cisco (CSCO) stock and sell the August 17 Call option. This will give you downside protection of 10.84%. The current options market is factoring in an 80.2% probability Cisco will be above the indicated strike at August options expiration yielding a 1.60% return.

Option Strategy #5: Buy Ebay (EBAY) stock and sell the August 15 Call option. This will give you downside protection of 13.93%. The current options market is factoring in an 82.2% probability Ebay will be above the indicated strike at August options expiration yielding a 1.70% return.

Option Strategy #6: Buy Google (GOOG) stock and sell the August 390 Call option. This will give you downside protection of 9.81%. The current options market is factoring in a 78.6% probability Google will be above the indicated strike at August options expiration yielding a 1.64% return.

Option Strategy #7: Buy Hewlett Packard (HPQ) stock and sell the August 34 Call option. This will give you downside protection of 10.10%. The current options market is factoring in a 77.90% probability Hewlett Packard will be above the indicated strike at August options expiration yielding a 1.64% return.

Option Strategy #8: Buy International Business Machine (IBM) stock and sell the August 95 Call option. This will give you downside protection of 8.81%. The current options market is factoring in an 82.2% probability IBM will be above the indicated strike at August options expiration yielding a 0.82% return.

Option Strategy #9: Buy Intel (INTC) stock and sell the August 15 Call option. This will give you downside protection of 11.76%. The current options market is factoring in an 82.9% probability Intel will be above the indicated strike at August options expiration yielding a 0.89% return.

Option Strategy #10: Buy Microsoft (MSFT) stock and sell the August 21 Call option. This will give you downside protection of 10.30%. The current options market is factoring in an 80.5% probability Microsoft will be above the indicated strike at August options expiration yielding a 1.17% return.

Option Strategy #11: Buy Palm (PALM) stock and sell the August 12.50 Call option. This will give you downside protection of 18.11%. The current options market is factoring in a 78.1% probability Palm will be above the indicated strike at August options expiration yielding a 3.55% return.

Option Strategy #12: Buy Qualcomm (QCOM) stock and sell the August 41 Call option. This will give you downside protection of 9.85%. The current options market is factoring in a 76.8% probability Qualcomm will be above the indicated strike at August options expiration yielding a 1.68% return.

Option Strategy #13: Buy Research in Motion (RIMM) stock and sell the August 60 Call option. This will give you downside protection of 11.33%. The current options market is factoring in a 77.7% probability Research in Motion will be above the indicated strike at August options expiration yielding a 1.99% return.

Option Strategy #14: Buy Verizon (VZ) stock and sell the August 26 Call option. This will give you downside protection of 10.81%. The current options market is factoring in an 82.4% probability Verizon will be above the indicated strike at August options expiration yielding a 0.62% return.

Option Strategy #15: Buy Yahoo (YHOO) stock and sell the August 14 Call option. This will give you downside protection of 11.13%. The current options market is factoring in an 83.4% probability Yahoo will be above the indicated strike at August options expiration yielding a 3.36% return.

These options expire on August 22; therefore the last trading day is Friday August 21, 2009. As you can see the less volatile the underlying stock and greater probability of expiring above indicated strike price at expiration, the lower the return % by expiration is. In the case the option expires out of the money (dead), meaning it drops and closes below the indicated strike price at expiration, 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 stock ideas, the one which looks best to me based on this analysis is Yahoo. This is because the return is almost double the average of these 15 listed in this article, and the downside protection, and current probability of expiring above the indicated strike at expiration are both above average.

Below is a spreadsheet of 15 stocks listed in this analysis, and I've made it very easy to identify which category(s) the stock is above average in.
  • If the stock is above average in the return % category, the % is highlighted in yellow
  • If the stock is above average in the downside protection % category, the % is highlighted in orange
  • If the stock is above average in the probability % category, the % is highlighted in blue
As you will see the only stock which is highlighted in all three categories is Yahoo. Second best in my opinion would be Research in Motion, as the two most important categories: return % and downside protection % are highlighted. The spreadsheet is ranked in alphabetic order (To print click image to enlarge).



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