Daily Stock Market Equity and Options Trading Commentary

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Friday, January 15, 2010

25 High Yielding Option Write Ideas for January's Option Expiration Friday

In this post I will outline 25 stocks which will return high one day returns using the buy write option strategy. This post assumes the underlying security will be at or above the indicated strike price at market close. First and foremost 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. 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 more risky.

To understand the table, I will give a detailed example of Option Maestro favorite Suntech Power (STP) below.

Sell the at-the-money STP January 16 strike call option. The premium received from the call option would give a downside protection of 2.18%. If the stock closes above 16 at the end of trade including post-market trade (it will get assigned) today the total return from this position would be 1.62% 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 in green. The data listed in red bold represents greater than the group average.

Company Ticker Strike Potential Return % Protection %
A123 Systems AONE 20 1.47 3.43
Textron TXT 22.5 1.14 2.41
Suntech Power STP 16 1.62 2.18
Rambus RMBS 21 1.28 2.08
Dow Chemical DOW 30 0.33 2.06
First Solar FSLR 125 2.17 2.04
Baidu BIDU 460 0.79 1.70
Direxion Daily Financial Bull 3X ETF FAS 86 2.38 1.70
JP Morgan JPM 45 1.95 1.25
Potash POT 115 0.86 1.13
American Express AXP 43 1.76 1.01
Wells Fargo & Company WFC 29 1.03 1.00
MasterCard MA 260 0.55 0.73
Research in Motion RIMM 66.62 0.77 0.66
Las Vegas Sands LVS 19 2.52 0.64
Illumina, Inc. ILMN 40 3.13 0.64
Cisco CSCO 25 0.84 0.60
Goldcorp GG 41 1.48 0.49
Google GOOG 590 0.50 0.47
Alcoa AA 16 1.64 0.44
Apple AAPL 210 0.69 0.42
Dendreon DNDN 30 1.83 0.41
Goldman Sachs GS 170 1.26 0.39
Caterpillar CAT 62.5 1.05 0.21
Amazon AMZN 130 2.27 0.19

1.41 1.13

From the table above I will be looking to pick up shares of Suntech Power (STP), A123 Systems (AONE), and First Solar (FSLR) (for a one day option write). If these shares close below the strike I may end up with them and I don't mind as I'll take them into my portfiolio. 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. Be sure to check out other leveraged ETF's for similar strategies such as: SSO, SDS, UCO, UYM, UYG, SKF, TNA, TZA, BGU, BGZ, ERX, ERY, and many 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 many of the stocks listed above in the past, I've written them out for a variety of strikes for the January 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 AXP, GOOG January 2011 300 Calls, GS January 2011 100 Calls, TXT February 23 Calls, Short AA January 15 Puts, AXP January 44 Calls, AXP January 37.5 Puts, RIMM January 66.62 Puts, STP January 15 Puts, Sphere: Related Content


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