In this article I will write about 10 major financial stocks and a calendar spread option strategy on each one. To understand this article you need somewhat of a background in stock options. o learn more about options and, how options can help protect your portfolio, and allow you to speculate with less money up front click here.
Calendar spreads are similar to bull call spreads, except the date for the expiration is different.
All data as of market close Thursday July 23, 2009. Pricing will change throughout the trading day.
Calendar Spread Option Strategy #1: Purchase the in the money American Express (AXP) 10 strike January leap 2011 call option, and sell the 30 strike September 2009 call option against it. The cost of this strategy is $1,770 per option contract, and if the stock is assigned at September expiration the profit from this position is $230 per contract or 12.99% (57 calendar days). This position will be profitable (not taking into account commissions) as long as American Express is at or above $27.70 a share by September 19, 2009 (September options expiration). The current options market is factoring in a 49.0% probability American Express will be at or above 30 a share at September options expiration.
Calendar Spread Option Strategy #2: Purchase the in the money Bank of America (BAC) 5 strike January leap 2011 call option, and sell the 13 strike September 2009 call option against it. The cost of this strategy is $727 per option contract, and if the stock is assigned at September expiration the profit from this position is $73 per contract or 10.04%. This position will be profitable as long as Bank of America is at or above $12.27 a share by September 19, 2009. The current options market is factoring in a 49.3% probability Bank of America will be at or above 13 a share at September options expiration.
Calendar Spread Option Strategy #3: Purchase the in the money Bank of New York Mellon (BK) 10 strike January leap 2011 call option, and sell the 27.50 strike September 2009 call option against it. The cost of this strategy is $1,600 per option contract, and if the stock is assigned at September expiration the profit from this position is $150 per contract or 9.38%. This position will be profitable as long as Bank of NY Mellon is at or above $26.00 a share by September 19, 2009. The current options market is factoring in a 47.6% probability Bank of NY Mellon will be at or above 27.50 a share at September options expiration.
Calendar Spread Option Strategy #4: Purchase the in the money Goldman Sachs (GS) 100 strike January leap 2011 call option, and sell the 180 strike September 2009 call option against it. The cost of this strategy is $6,843 per option contract, and if the stock is assigned at September expiration the profit from this position is $1157 per contract or 16.91%. This position will be profitable as long as Goldman Sachs is at or above $168.43 a share by September 19, 2009. The current options market is factoring in a 26.1% probability Goldman Sachs will be at or above 180 a share at September options expiration.
Calendar Spread Option Strategy #5: Purchase the in the money JP Morgan (JPM) 10 strike January leap 2011 call option, and sell the 38 strike September 2009 call option against it. The cost of this strategy is $2,566 per option contract, and if the stock is assigned at September expiration the profit from this position is $234 per contract or 9.12%. This position will be profitable as long as JP Morgan is at or above $35.66 a share by September 19, 2009. The current options market is factoring in a 54.1% probability JP Morgan will be at or above 38 a share at September options expiration.
Calendar Spread Option Strategy #6: Purchase the in the money KeyCorp (KEY) 2.50 strike January leap 2011 call option, and sell the 5 strike December 2009 call option against it. The cost of this strategy is $215 per option contract, and if the stock is assigned at December expiration the profit from this position is $35 per contract or 16.28%. This position will be profitable as long as KeyCorp is at or above $4.65 a share by December 19, 2009. The current options market is factoring in a 65.3% probability KeyCorp will be at or above 5 a share at December options expiration.
Calendar Spread Option Strategy #7: Purchase the in the money Morgan Stanley (MS) 12.50 strike January leap 2011 call option, and sell the 28 strike September 2009 call option against it. The cost of this strategy is $1,440 per option contract, and if the stock is assigned at September expiration the profit from this position is $110 per contract or 7.64%. This position will be profitable as long as Morgan Stanley is at or above $26.90 a share by September 19, 2009. The current options market is factoring in a 57.6% probability Morgan Stanley will be at or above 28 a share at September options expiration.
Calendar Spread Option Strategy #8: Purchase the in the money PNC Financial (PNC) 10 strike January leap 2011 call option, and sell the 35 strike November 2009 call option against it. The cost of this strategy is $2,170 per option contract, and if the stock is assigned at November expiration the profit from this position is $330 per contract or 15.21%. This position will be profitable as long as PNC is at or above $31.70 a share by November 21, 2009. The current options market is factoring in a 58.6% probability PNC will be at or above 35 a share at November options expiration.
Calendar Spread Option Strategy #9: Purchase the in the money State Street (STT) 10 strike January leap 2011 call option, and sell the 48 strike September 2009 call option against it. The cost of this strategy is $3,515 per option contract, and if the stock is assigned at September expiration the profit from this position is $285 per contract or 8.11%. This position will be profitable as long as State Street is at or above $45.15 a share by September 19, 2009. The current options market is factoring in a 57% probability State Street will be at or above 48 a share at September options expiration.
Calendar Spread Option Strategy #10: Purchase the in the money Wells Fargo (WFC) 7.50 strike January leap 2011 call option, and sell the 24 strike September 2009 call option against it. The cost of this strategy is $1,505 per option contract, and if the stock is assigned at September expiration the profit from this position is $145 per contract or 9.63%. This position will be profitable as long as Wells Fargo is at or above $22.55 a share by September 19, 2009. The current options market is factoring in a 53.3% probability Wells Fargo will be at or above 24 a share at September options expiration.
When I open option calendar spread positions, I like to purchase contracts which have the longest time until expiration, and like to write the contracts with the closest time until expiration against it (given roughly a 5% return if assigned or greater). If the stock is not assigned at expiration, I simply write it out for a similar strike price for the following month.
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.
I've been using this strategy to sell near the money calls on my leap options for the short term, and find it to be a great source of generating income for my portfolio. If I want to be long a stock I simply purchase in the money leap options, and write call options for the near term expiration against them. It is a great way to be in the stock, receive income (premiums) month after month (that's if I don't get called out), while returning a profit on the position if the stock happens to be assigned. The downside however is you limit your upside gain for the stock.
In the past 5 years, the volume of option contracts traded has exploded according to the Chicago Board Options Exchange (CBOE). The reason being is that more and more investor's are finding options to be a good source of income, a great way to hedge their portfolios, and a way to speculate with less cash up front. To see a chart showing options volume over the last 5 years, and to learn more about options in general click here.
Below is a printable spreadsheet of the stocks in this analysis ranked in order from least to greatest return (click to enlarge and print).
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