The table below shows some of the stocks I'm willing to go long (for reasons not discussed in this post), which will be reporting earnings this week. To understand the table below read the example used with Apple (AAPL) below.
With Apple reporting after the bell Monday, it may be a great day to sell put options as implied volatility will likely soar before the earnings release. For example, let's say I would be willing to purchase Apple stock at 5% less than its current share price, I would look to sell the November 180 strike Put options (roughly 7% lower with premium received), and with the money received would look to purchase November 200 strike call options. Opening this position would put $100 in my portfolio. If Apple expires between 180 and 200 a share at November expiration this position would return $100. However if Apple can get and close above 200 at November options expiration, this position has the potential to return even more. The break even for this position is Apple at 179 a share at expiration, anything less would result in an unrealized loss on 100 shares of Apple stock. The December contracts are not yet open (they will be as of market open), but I will likely choose to purchase call options on the December 210 (instead of the November 200), as they have more time value and do not have the same high levels of the implied volatility factored into the option premiums.
Note that the column labeled Put is the November Put Option I am looking to sell, the column labeled Call is the November Call Option I am looking to purchase with the premium received from selling the Put, and Net is the Net amount of cash I would receive (based on data as of market close Friday October 16, 2009). Also note it may be a good idea to choose a higher strike December dated option contract as stated in the Apple example above.
|Texas Instruments Inc.||TXN||21||25||$14|
|The Coca-Cola Company||KO||52.5||57.5||$15|
|E.I. du Pont de Nemours & Company||DD||32||36||$25|
|Gilead Sciences, Inc.||GILD||44||49||$5|
|Jefferies Group, Inc.||JEF||25||35||$5|
|State Street Corporation||STT||50||60||$110|
|The Bank of New York Mellon Corporation||BK||25||30||$25|
|United Technologies Corporation||UTX||60||70||$35|
|Walter Energy, Inc.||WLT||60||70||$55|
|The Boeing Company||BA||49||60||$70|
|Eli Lilly & Co.||LLY||33||36||$30|
|Southern Copper Corporation||PCU||30||40||$30|
For the companies reporting earnings Thursday and Friday I will post an update to this article Wednesday. This is a bullish strategy and should not be considered if you think the stock will sell off after earnings. However if you feel you've missed the stock and think it could move sideways or up after they report, this strategy could yield a nice return.
To better understand options in general, including this strategy, these percentage calculations, and other option strategies click here.
The list above are stocks which I wouldn't mind holding in my portfolio if they get PUT to me 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.
I use this strategy to open long positions when the market has rallied as much as it has. This strategy will allow me to purchase stocks for less, as well as provide a return without the stock if the market continues to rally. 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 AAPL November 200 Call Options, Short AAPL November 180 Put Options
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