A wise man once said "be fearful when others are greedy and greedy when others are fearful" and this can't be more true in the world of derivatives. When fear or Volatility increases in the market, option premiums soar and easy money can be made. In this post I will explain how I am taking advantage of the increased levels of fear in the market to make some money.
First, I'll give a quick fact... The S&P 500 is down about 9% from the high on April 26, and the Volatility Index [VIX] has soared almost 240% in that same period. As I stated, money can easily be made selling option premium, but it can also be lost just as easy. However, I'm a bit more conservative and I choose to sell put options 5% - 10% lower on stocks or market ETFs I'm willing to take shares of. This is the reason I hold a ton of cash on the sidelines at all times, so I can take the shares if I am wrong without going into margin.
I began selling put options on stocks and ETFs I am willing to take shares of on Friday, after realizing the SPY bounced off of the 200 day moving average. I mainly sold put options on companies which have been beaten up after good earnings, but I also sold put options on a few of my favorite companies. I have put (no pun intended) together a short list of stocks below which I have sold puts on, or will be selling puts on in the week ahead for the May options expiration. The data below is as of market close Friday May 7, 2010.
|SPDR Dow Jones Industrial Average ETF||(NYSEARCA:DIA)||99||$150||97.50|
|SPDR S&P 500 ETF||(NYSEARCA:SPY)||106||$190||104.10|
|PowerShares QQQ Trust, ETF||(QQQQ)||43||$73||42.27|
|United States Oil Fund LP ETF||(NYSEARCA:USO)||35||$76||34.24|
|SPDR S&P Metals and Mining ETF||(NYSEARCA:XME)||49||$135||47.65|
|American Express Company||(NYSE:AXP)||37||$67||36.33|
|Bank of America Corporation||(NYSE:BAC)||15||$40||14.60|
|Ford Motor Company||(NYSE:F)||11||$34||10.66|
|General Electric Company||(NYSE:GE)||15||$21||14.79|
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. The reason option volumes have surged in the last five 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.
The ideas outlined above are bullish strategies and should not be considered if you think the stock will sell off in the near future. However, if you feel the stock could move higher or slightly lower in the near future, this strategy could yield a nice gain. Selling puts "naked" is a very risky strategy and should not be considered with stocks one does not plan on holding, or want in their portfolio. To get a better understanding of stock options and different option strategies please check out my Simplified Stock Option Trading E-Books.
Disclosure: Short May AAPL 220 Put Options, AXP 38 Put Options, BAC 16 Put Options, F 12 & 13 Put Options, GLW 16 & 18 Put Options, GOOG 450 & 510 Put Options, QCOM 36 & 38 Put Options, V 75 Put Options, XME 50 Put 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.
The reason option volumes have surged in the last five 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.