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Daily Stock Market Equity and Options Trading Commentary

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Tuesday, August 4, 2009

Is it Time to Put the Banks in Place? Using Put Options to Purchase Stocks

As stated in Why I Sell Put Options Instead of Setting Limit and Market Orders Part I and Part II, I will outline 13 more ideas on the major financial stocks/ETF's. As we know the financial sector has rallied the most since March 6, 2009 and although many of them still have bullish technicals, I am being very cautious getting long on them. However, I am bullish long term and would look at getting into any of the major financial companies for 10% lower. This strategy is ideal for this type of speculation, and instead of waiting on the sidelines with a stock limit order, it allows you to participate in the market in case this rally keeps in going.

In this post I will demonstrate this option strategy on a list of 13 popular financial stocks/ETF's. To learn more about this option strategy and options in general check out my blog or options trading E-Books here.

All data as of market close Tuesday August 4, 2009.

HOW TO READ THE TABLE

NOTE: When using this strategy, I first decide what I am willing to pay for the stock. Let's keep it simple and say I'm willing to buy the stock/ETF at a share price of 10% lower.

Price: The most recent closing price (last quote price) for the stock
10% Lower: The price which I am willing to pay for the stock which is 10% lower than the closing price
Strike: The closest contract strike price to the 10% lower price. It may be slightly higher or slightly lower than the 10% lower price.
Prem.: This is the theoretical premium received from selling the put option
Adj. Cost: This is the adjusted cost for the stock, if you do happen to end up with the shares at expiration.

The first stock listed in the table below is American Express (AXP). An example of this option strategy on AXP would be interpreted as:

Sell the American Express (AXP) September 26 put option. This will currently give you $1.01 a share. If American Express expires above the indicated strike price you profit 100% of the premium received, if not your cost per share of the stock is $24.99, 12.96% lower than the close price and 3.89% lower than the price I was willing to pay of $26 a share. This strategy allows you to profit if:
  • The stock continues to move up over the next 45 calendar days
  • The stock moves sideways over the next 45 calendar days
  • The Stock sells off, but by less than 12.96% by option expiration
Company Ticker 10% Lower Strike Prem. Adj. Cost






American Express Company NYSE:AXP 25.84 26 1.01 24.99
Bank of America Corporation NYSE:BAC 14.08 14 0.45 13.55
Citigroup Inc. NYSE:C 2.93 3 0.19 2.81
Direxion Daily Finan. Bull 3X Shs(ETF) NYSE:FAS 59.31 59 5.6 53.4
Financial Select Sector SPDR (ETF) NYSE:XLF 12.25 12 0.1 11.9
Goldman Sachs Group, Inc. NYSE:GS 148.65 150 2.61 147.39
JPMorgan Chase & Co. NYSE:JPM 36.19 36 0.51 35.49
Morgan Stanley NYSE:MS 27.06 27 0.57 26.43
ProShares Ultra Financials (ETF) NYSE:UYG 4.52 5 0.43 4.57
State Street Corporation NYSE:STT 48.66 49 1.2 47.8
SunTrust Banks, Inc. NYSE:STI 18.69 19 0.98 18.02
The Bank of New York Mellon Corporation NYSE:BK 25.68 26 0.63 25.37
Wells Fargo & Company NYSE:WFC 23.90 24 0.73 23.27

All of these options expire on September 19; therefore the last trading day is Friday, September 18, 2009.

I have been using this strategy to purchase my shares and I find it has been working well. It's a bad idea to use this strategy as a form of speculation, in other words selling a put for the premium just because you think a stock will never get to a lower strike by options expiration. Remember even if the stock goes to $0 a share, you're still obligated to buy it for the indicated strike.

The reason option volumes have surged in the last 5 years is because they are a great way to hedge your portfolio as well as create income off of your shares (see CBOE option volume chart here).

These are just examples, if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.


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