In this article I will write about the top 20 stocks in the NASDAQ 100 (by market cap) using this strategy. If you'd like to learn more about this type of strategy or more about options in general check out my blog or options trading E-Books here. I'll also write about using this strategy on three popular Tech ETF's following my analysis of the twenty companies.
All data as of market close Wednesday August 5, 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 7% lower.
Price: The most recent closing price (last quote price) for the stock
7% Lower: The price which I am willing to pay for the stock which is 7% lower than the closing price
Strike: The closest contract strike price to the 7% lower price. It may be slightly higher or slightly lower than the 7% 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 Microsoft (MSFT). An example of this option strategy on MSFT would be interpreted as:
Sell the Microsoft (MSFT) September 22 put option. This will currently give you $0.61 a share. If Microsoft expires above the indicated strike price of 22 you profit 100% of the premium received, if not your cost per share of the stock is $21.39, 10.16% lower than the close price and 2.77% lower than the price I was willing to pay of $22 a share. This strategy allows you to profit if:
- The stock continues to move up over the next 44 calendar days
- The stock moves sideways over the next 44 calendar days
- The Stock sells off, but by less than 10.16% by option expiration
|Company||Ticker||7% Lower||Strike||Prem.||Adj. Cost|
|Cisco Systems, Inc.||NASDAQ:CSCO||20.5995||21||0.32||20.68|
|Teva Pharmaceutical Industries Ltd (ADR)||NASDAQ:TEVA||48.7599||50||0.73||49.27|
|Research In Motion Limited (USA)||NASDAQ:RIMM||74.214||75||2.74||72.26|
|Gilead Sciences, Inc.||NASDAQ:GILD||43.5333||44||0.85||43.15|
|The DIRECTV Group, Inc.||NASDAQ:DTV||23.9568||24||0.55||23.45|
|Infosys Technologies Limited (ADR)||NASDAQ:INFY||41.3571||40||0.88||39.12|
|Costco Wholesale Corporation||NASDAQ:COST||45.6258||45||0.5||44.5|
|Technology SPDR (ETF)||NYSE:XLK||18.3489||18||0.17||17.83|
|ProShares Ultra Technology (ETF)||NYSE:ROM||35.5818||35||1.27||33.73|
|Direxion Daily Tech Bull 3x Shs (ETF)||NYSE:TYH||107.7219||110||8.55||101.45|
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.
It is important to note that if the stock is below the indicated strike at expiration, and you don't want to take the shares into your portfolio at that point, you can purchase the put contracts to close the position, and sell a similar strike (usually I sell the same one) for the following month (known as rolling).
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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