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 %|
|Las Vegas Sands||LVS||17||1.71||1.42|
|Bank of America||BAC||16||0.62||1.12|
|Research in Motion||RIMM||60||2.28||0.31|
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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