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Friday, October 16, 2009

25 Option Write Ideas for October Expiration Friday

In a previous OptionMaestro.com post, I outlined 25 stocks which I wouldn't mind going long at these levels. I wrote about getting long the stocks by using the buy-write option strategy. This is an updated post to that one, adjusting the strikes and prices accordingly for options expiration today. It is very important to write the shares out as early as possible as volatility rushes into the market in the morning, and not wait for it to start decreasing rapidly in the afternoon. It's not too late to get premium out of many of these stocks, and writing them for just a day decreases risk greatly. I will look to be purchasing some of the stocks mentioned below pre-market to write out at opening bell. As I've stated, I don't mind holding any of these stocks long which is why I'll be using this strategy tomorrow. If I get called out I won't mind because I'll still make money. Below is the list of stocks, the potential return if exercised, and protection if they do not get exercised. 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 STEC Inc. (STEC) below.

Sell the in-the-money STEC October 25 strike call option. The premium received from the call option would give a downside protection of 1.87%. If the stock is assigned at options expiration on October 17, 2009 the total return from this position would be 1.15% in 1 trading day.

Company Ticker Strike Potential Return % Protection %
Brocade BRCD 10 5.33 0.84
STEC STEC 25 1.15 1.87
Palm PALM 17 4.13 0.79
First Solar FSLR 155 2.38 0.92
MasterCard MA 230 2.24 0.18
Google GOOG 530 2.09 2.08
Las Vegas Sands LVS 17 2.07 1.65
Walter Energy WLT 65 2.07 1.09
Goldcorp GG 42.5 1.74 0.52
Bank of America BAC 18 1.71 2.27
Dendreon DNDN 30 1.50 1.20
Baidu BIDU 400 1.41 1.39
Rambus RMBS 19 1.37 1.47
Potash POT 95 1.28 0.42
Baxter BAX 55 1.28 0.37
Caterpillar CAT 55 1.11 0.69
Dow Chemical DOW 27 1.11 1.11
Goldman Sachs GS 190 1.07 0.34
A123 Systems AONE 22.5 1.04 3.47
Visa V 75 0.63 0.73
Amazon AMZN 95 0.62 1.68
Textron TXT 20 0.54 2.21
Apple AAPL 190 0.39 0.69
Buffalo Wild Wings BWLD 40 0.33 5.23
Charles Schwab SCHW 18 0.22 2.18

Individual stocks may not return as much as some of the double and triple leveraged ETF's. For example If I was bullish on the financial sector, I may not mind holding the Direxion Daily 3X Bull (FAS) (short-term of course as these shares don't make good investment vehicles), I would choose to purchase the stock pre-market and write out call options at open. If I was more bearish on the financials I may look at purchasing the Direxion Daily 3X Bear (FAZ) and write at-the-money calls out on it. For an example, we'll assume the FAS opens today at the close price Thursday. Therefore I would look to purchase shares at around 92 pre-market and write calls for the 92. As of Thursday's close this position would yield 2.00% and would protect my shares to the downside 1.96%. Be sure to check out other shares of Direxion ETF's for similar strategy such as: TNA, TZA, BGU, BGZ, ERX, ERY

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, GOOG March 250 Call Options, LVS, PALM October 14 Call Options, V, Short BAC October 18 & 19 Call Options, BRCD 9 & 10 Call Options, DNDN October 28 & 29 Call Options, GOOG March 560 Call Options, LVS October 18 & 20 Call Options

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2 comments:

Anonymous said...

Marco,

A day before expiration to buy shares of a company at the pre-market sounds good in your scenario. Do you ever consider doing it farther out from expiration or is a day from expiration the optimum for this setup?

Marco Hickey said...

Yes I always write shares out for the coming expiration. My favorite time frame to work with is between 1-3 weeks until expiration. I usually sell calls and buy them back if I get a chance on weakness on stocks I don't mind holding.

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