With the September options expiration approaching us in just 4 days, I thought I would outline some trade ideas on stocks I wouldn't mind going long (with the exception of AIG), that would return good percentages in just 4 days. When using the buy/write option strategy, it is important that you are willing to hold the security in case it is below the strike price at options expiration. I have put together a list of stocks/ETFs which will return a nice percentage gain if they are above the strike price as of September options expiration, but will also protect (lower cost basis) to the downside in case the stock/ETF sells off slightly and expires below the strike price. The list below is a very tall one, and for your convenience I have ranked the securities in order from the largest percent return to the least. 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 Bank of America (BAC) below.
Sell the Bank of America September 17 strike call option. The premium received from the call option would give a downside protection of 1.82%. If the stock is assigned at options expiration on September 19, 2009 the total return from this position would be 1.88% in 4 trading days.
|Company||Ticker||Strike||Potential Return %||Protection %|
|American Intl. Group||AIG||41||5.18||5.45|
|SXC Health Solutions||SXCI||45||4.30||0.80|
|Direxion Daily Financial Bull 3X ETF||FAS||80||3.87||3.33|
|Allied Irish Banks, plc||AIB||7.5||3.81||5.26|
|Hartford Financial Services||HIG||26||3.69||2.72|
|Coventry Health Care, Inc.||CVH||25||3.55||2.82|
|Teck Resources Limited||TCK||27||3.50||1.88|
|Wynn Resorts, Limited||WYNN||70||3.46||2.24|
|First Solar, Inc.||FSLR||135||3.28||1.84|
|Discover Financial Services||DFS||15||3.13||3.33|
|Agnico-Eagle Mines Limited||AEM||70||3.01||2.16|
|Allegheny Technologies Incorporated||ATI||34||2.91||2.08|
|Eastman Kodak Company||EK||6||2.69||7.90|
|Human Genome Sciences||HGSI||20||2.64||4.89|
|SL Green Realty Corp.||SLG||40||2.47||2.62|
|Las Vegas Sands Corp.||LVS||17.5||2.44||5.54|
|Kinross Gold Corporation||KGC||22||2.36||2.50|
|Genworth Financial, Inc.||GNW||11||2.28||5.71|
|CME Group Inc.||CME||280||2.17||1.44|
|Cliffs Natural Resources Inc||CLF||30||2.14||3.45|
|Chesapeake Energy Corporation||CHK||27||2.07||2.40|
|Capital One Financial Corp.||COF||38||2.04||2.87|
|Goldman Sachs Group, Inc.||GS||180||1.99||0.70|
|Gold Fields Limited||GFI||14||1.90||3.17|
|Wells Fargo & Company||WFC||28||1.90||1.61|
|Bank of America Corporation||BAC||17||1.88||1.82|
|JPMorgan Chase & Co.||JPM||44||1.85||1.28|
|Wells Fargo & Company||WFC||28||1.54||1.25|
|Deere & Company||DE||43||1.36||1.96|
To better understand options in general, including this strategy, these percentage calculations, and other option strategies click here. As a shareholder of Bank of America, Citigroup, and Goldman Sachs shares, I've written them out for a variety of strikes for the September options expiration, as the volatility of the underlying stock gives a very nice premium, even on out of the money options.
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 BAC, C, CAT, GS, PALM, Short BAC September 20 Call Options, C September 5 Call Options, PALM September 16 Call Options