Daily Stock Market Equity and Options Trading Commentary

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Friday, November 20, 2009

30 High Yielding Option Write Ideas for November's Option Expiration Friday

In a previous post, I outlined 30 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 during pre-market or near market open to write out within an hour of the 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 today. 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 downside 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 Option Maestro favorite Suntech Power (STP) below.

Sell the at-the-money STP November 16 strike call option. The premium received from the call option would give a downside protection of 1.56%. If the stock closes above 16 (it will get assigned) today the total return from this position would be 1.63% in just 6.5 trading hours.

I have ranked the stocks in the table below in order from greatest to least protection (note that most of these stocks with greater protection have less return, as they are deeper in the money or have less volatility than others listed). I have also calculated the group average return and protection which is the very bottom row of the table. The data in bold represents greater than the group average.

Company Ticker Strike Potential Return % Protection %
Ford F 8 0.23 8.59
Citigroup C 4 1.64 7.75
A123 Systems AONE 15 1.77 3.28
Rambus RMBS 18 0.65 2.56
Alcoa AA 13 0.45 2.12
Textron TXT 20 1.09 1.98
Goldman Sachs GS 170 0.20 1.83
First Solar FSLR 120 0.88 1.81
Suntech Power STP 16 1.63 1.56
Las Vegas Sands LVS 17 1.71 1.42
Dendreon DNDN 28 1.11 1.28
Dow Chemical DOW 28 0.93 1.21
Bank of America BAC 16 0.62 1.12
Brocade BRCD 8 0.62 1.12
Walter Energy WLT 70 1.55 1.05
American Express AXP 41 0.70 1.05
Visa V 80 0.67 0.90
Goldcorp GG 44 0.86 0.89
Apple AAPL 200 0.50 0.76
Google GOOG 570 0.16 0.68
Potash POT 115 2.27 0.65
MasterCard MA 230 0.56 0.60
Baidu BIDU 430 0.98 0.51
Amazon AMZN 130 1.22 0.43
Palm PALM 12.5 7.91 0.43
Baxter BAX 55 0.49 0.40
JP Morgan JPM 43 1.41 0.35
Research in Motion RIMM 60 2.28 0.31
Cisco CSCO 24 1.56 0.21
Caterpillar CAT 60 2.53 0.15
Group Average

1.31 1.57

From the table above I will be looking to pick up shares of Suntech Power (STP) for a one day option write. If these shares close below 16, I won't mind as I would like to add to my position anyhow. 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 76 pre-market and write calls for the 76. As of Thursday's close this position would yield 2.1% and would also protect my shares to the downside 2.1%. Be sure to check out other shares of Direxion ETF's for similar strategy such as: TNA, TZA, BGU, BGZ, ERX, ERY, and others.

To better understand options in general, including this strategy, these percentage calculations, and other option strategies please check out my Simplified Stock Option Trading E-Books. As a shareholder of Bank of America, Las Vegas Sands, Palm and Suntech Power, I've written them out for a variety of strikes for the November 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 AAPL December 200 Calls, AXP, BAC, GOOG January LEAP 300 Calls, LVS, PALM, STP, V November 60 Calls, Short AXP November 38 & 41 Calls, GOOG November 580 Calls, V November 80 Calls

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