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 %|
|Las Vegas Sands||LVS||18||3.89||2.42|
|Bank of America||BAC||18||3.54||2.47|
|Buffalo Wild Wings||BWLD||40||1.45||1.74|
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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