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|
|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|
|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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