Daily Stock Market Equity and Options Trading Commentary

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Wednesday, October 14, 2009

25 High Yielding Buy-Writes for October Options Expiration

With the October options expiration approaching us in just 3 days, I thought I would outline some trade ideas on stocks I wouldn't mind going long on, that would return good percentages by Friday (as of market close Tuesday). When using the buy/write option strategy, it is important that you are willing to hold the security in case it is below the strike price at options expiration. I have put together a list of stocks which will return a nice percentage gain if they are above the strike price as of October options expiration, but will also protect (lower cost basis) to the downside in case the stock sells off slightly and expires below the strike price. The list below is a very tall one, and for your convenience I have ranked the securities in order from the largest potential % return to the least. To learn more about the buy/write option strategy, risks, pricing, calculations, other strategies, and options in general, click here.

Note that higher beta securities return higher percentages due to their levels of implied volatility, and because they are riskier.

To understand the table, I will give a detailed example of Bank of America (BAC) below. Also note Bank of America Reports earnings Thursday which will give even more implied volatility and a higher premium to the call options.

Sell the Bank of America October 18 strike call option. The premium received from the call option would give a downside protection of 2.47%. If the stock is assigned at options expiration on October 17, 2009 the total return from this position would be 3.54% in 3 trading days.

Company Ticker Strike Potential Return % Protection %
Brocade BRCD 10 6.95 1.58
STEC STEC 25 5.34 2.67
A123 Systems AONE 24 4.57 2.01
Rambus RMBS 19 4.27 1.51
Las Vegas Sands LVS 18 3.89 2.42
Bank of America BAC 18 3.54 2.47
Palm PALM 17 3.28 1.97
Google GOOG 530 3.18 2.44
Walter Energy WLT 60 2.92 2.26
Dendreon DNDN 29 2.92 2.22
Charles Schwab SCHW 19 2.48 2.37
First Solar FSLR 155 2.31 1.87
Dow Chemical DOW 26 2.20 1.93
Baidu BIDU 410 2.18 1.57
MasterCard MA 220 2.09 0.87
Goldman Sachs GS 185 1.65 2.84
Amazon AMZN 95 1.61 1.43
Textron TXT 19 1.57 2.35
Baxter BAX 57.5 1.47 1.82
Buffalo Wild Wings BWLD 40 1.45 1.74
Potash POT 90 1.44 1.53
Goldcorp GG 42.5 1.33 2.22
Visa V 75 1.31 0.87
Apple AAPL 190 1.08 1.09
Caterpillar CAT 52.5 1.06 1.52

To better understand options in general, including this strategy, these percentage calculations, and other option strategies click here. As a shareholder of Bank of America, Brocade, Dendreon, Las Vegas Sands, Palm, and Visa I've written them out for a variety of strikes for the October options expiration, as the volatility of the underlying stock gives a very nice premium, even on out of the money options.

The list above are stocks which I wouldn't mind holding in my portfolio if they did not get exercised at expiration. 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.

This is an ideal strategy to open long positions when the market has rallied as much as it has. This strategy will give protection if the market sells off, as well as provide a return if the market continues to rally. If the stock is not assigned, this strategy is a great way to create additional income for your portfolio. 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 chart here). Keep in mind when using this strategy it is essential that broker commissions are low enough to profit from the position.

Disclosure: Long BAC, BRCD, DNDN, LVS, PALM, PALM October 14 Call Options, V, Short BAC October 18 & 19 Call Options, BRCD 9 & 10 Call Options, DNDN October 28 Call Options, LVS October 20 Call Options

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Anonymous said...

Marco ---

At times in your posts you make note of companies that have dividend payouts near the time of options expiration. What do you find favorable about companies in these situations? Increased volatility?

Marco Hickey said...

They are among the most active. I personally do not take part in dividend trades.

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