Popular Tech Stocks: 15 Option Strategies

With the July options expiration coming to an end this Friday, I decided it's time to look ahead to the August options expiration.

In this post, I'll be analyzing 15 popular technology stocks to see which stock offers the best mix of both return percentage (assuming the stock will be called out at the August expiration) and downside protection percentage or "ProTECHtion". I will then decide which stock is the "best bang for my/your buck". This is one of my more conservative option strategies. I think it's a good time for this analysis, as I am still anticipating the market to pull back (reason and chart stated here).

To understand this post you'll need to have the knowledge of options. If you don't understand options and would like to learn more about them, like how they can be used for portfolio protection or a cheaper way to speculate, and more click here.

For this analysis I've decided to choose a strike price at least 7% in the money for each stock (the highest strike price which is lower than the current share price discounted 7%).

All data is as of market close Tuesday July 14, 2009.

Option Strategy #1: Buy Amazon (AMZN) stock and sell the August 75 Call option. This will give you downside protection of 11.26%. The current options market is factoring in a 72.9% probability Amazon will be above the indicated strike at August options expiration yielding a 2.78% return.

Option Strategy #2: Buy Apple (AAPL) stock and sell the August 130 Call option. This will give you downside protection of 10.40%. The current options market is factoring in a 78.4% probability Apple will be above the indicated strike at August options expiration yielding a 1.78% return.

Option Strategy #3: Buy AT&T (T) stock and sell the August 21 Call option. This will give you downside protection of 11.22%. The current options market is factoring in an 82% probability AT&T will be above the indicated strike at August options expiration yielding a 0.77% return.

Option Strategy #4: Buy Cisco (CSCO) stock and sell the August 17 Call option. This will give you downside protection of 10.84%. The current options market is factoring in an 80.2% probability Cisco will be above the indicated strike at August options expiration yielding a 1.60% return.

Option Strategy #5: Buy eBay (EBAY) stock and sell the August 15 Call option. This will give you downside protection of 13.93%. The current options market is factoring in an 82.2% probability eBay will be above the indicated strike at August options expiration yielding a 1.70% return.

Option Strategy #6: Buy Google (GOOG) stock and sell the August 390 Call option. This will give you downside protection of 9.81%. The current options market is factoring in a 78.6% probability Google will be above the indicated strike at August options expiration yielding a 1.64% return.

Option Strategy #7: Buy Hewlett Packard (HPQ) stock and sell the August 34 Call option. This will give you downside protection of 10.10%. The current options market is factoring in a 77.90% probability Hewlett Packard will be above the indicated strike at August options expiration yielding a 1.64% return.

Option Strategy #8: Buy International Business Machine (IBM) stock and sell the August 95 Call option. This will give you downside protection of 8.81%. The current options market is factoring in an 82.2% probability IBM will be above the indicated strike at August options expiration yielding a 0.82% return.

Option Strategy #9: Buy Intel (INTC) stock and sell the August 15 Call option. This will give you downside protection of 11.76%. The current options market is factoring in an 82.9% probability Intel will be above the indicated strike at August options expiration yielding a 0.89% return.

Option Strategy #10: Buy Microsoft (MSFT) stock and sell the August 21 Call option. This will give you downside protection of 10.30%. The current options market is factoring in an 80.5% probability Microsoft will be above the indicated strike at August options expiration yielding a 1.17% return.

Option Strategy #11: Buy Palm (PALM) stock and sell the August 12.50 Call option. This will give you downside protection of 18.11%. The current options market is factoring in a 78.1% probability Palm will be above the indicated strike at August options expiration yielding a 3.55% return.

Option Strategy #12: Buy Qualcomm (QCOM) stock and sell the August 41 Call option. This will give you downside protection of 9.85%. The current options market is factoring in a 76.8% probability Qualcomm will be above the indicated strike at August options expiration yielding a 1.68% return.

Option Strategy #13: Buy Research in Motion (RIMM) stock and sell the August 60 Call option. This will give you downside protection of 11.33%. The current options market is factoring in a 77.7% probability Research in Motion will be above the indicated strike at August options expiration yielding a 1.99% return.

Option Strategy #14: Buy Verizon (VZ) stock and sell the August 26 Call option. This will give you downside protection of 10.81%. The current options market is factoring in an 82.4% probability Verizon will be above the indicated strike at August options expiration yielding a 0.62% return.

Option Strategy #15: Buy Yahoo (YHOO) stock and sell the August 14 Call option. This will give you downside protection of 11.13%. The current options market is factoring in an 83.4% probability Yahoo will be above the indicated strike at August options expiration yielding a 3.36% return.

These options expire on August 22; therefore the last trading day is Friday August 21, 2009.

As you can see the less volatile the underlying stock and greater probability of expiring above indicated strike price at expiration, the lower the return percentage by expiration is. In the case the option expires out of the money (dead), meaning it drops and closes below the indicated strike price at expiration, I just write it out for a similar strike for the following month.

If you are more bullish/bearish you’ll want to adjust the strike price and expiration accordingly. If you’re more bearish write deeper in the money calls, you will not return as much if you get called out, but if you do, and the overall market is down you’ll most likely outperform the market.

Out of these 15 stock ideas, the one which looks best to me based on this analysis is Yahoo. This is because the return is almost double the average of these 15 listed in this article, and the downside protection, and current probability of expiring above the indicated strike at expiration are both above average.

For a printable spreadsheet of 15 stocks listed in this analysis, ranked in order by least to greatest return % and category averages click here.

Disclosure: Long Google 410 Leap 2011 Call options, Palm

Comments

[BullnBear:]

Did you notice the VIX creep up today? I suppose that you and I aren’t the only ones that are expecting a market pullback. The technical readings and the fundamentals don’t seem to support this but then again this year has been educational to say the least.

Jul 16 01:10 AM

[2contango:]

Be careful with AMZN. It's just a matter of time before it loses its core advantage: no sales tax. With states scrambling for revenue and tax rates in states like California rising, it's inevitable that Amazon will not be able to continue evading sales tax. And when that happens, watch for a sharp correction. Amazon obviously is scrambling to create new revenue sources. Whether it can ramp up soon enough to offset a hit to the retail business remains to be seen.

Jul 16 04:51 PM