Selling Into 2012: Part 1

Includes: ABT, GE, MDT, MO, PG, SPY
by: Bear Fight

As the market has drifted higher over the last few days on light volume, individual investors should take this opportunity to lighten up on equities or sell call options into the New Year. Thin trading volume and the markets levitation may provide an opportunity to exit position or sell covered calls on long-term positions before a tumultuous 2012.

Europe at the forefront in 2012

Timing of the European debt crisis will only become more acute into 2012 as countries seek to refinance debt and rating agencies digest the leader’s plans. Many market participants believe S&P is remaining on hold on its decision making until the new year as bank balance sheets are marked at the end of the year. Standard & Poor's is expected to release its verdict on debt ratings for 15 euro zone countries in January. The rating agency warned in early December that it may downgrade of credit ratings of euro zone countries if EU leaders failed to agree on how to solve the region's debt crisis at a Dec. 9 summit. Most market participants do not believe leaders provided a credible long-term plan.

Selling Calls Into the New Year

  1. Selling covered calls on largest holdings – With this strategy I am looking to augment income from existing holdings of large capitalization, dividend paying equities. If these equities continue to rise, I will be happy to let them ago at the strike price. If the stock is flat or deteriorates I will continue to own the stock and earn the premium, along with the dividend.
  1. Selling naked calls on S&P500 (NYSEARCA:SPY)This is a more risky strategy and should be used by more sophisticated investors. With this strategy I am betting that the market does not continue to rally heavily into 2012. With naked ETF calls sizing the position is important and I focus on closer expiration dates. I would never sell naked calls on individual equities.

Disclosure: I am long PM, MDT, ABT, GE, PG. I am short SPY calls.

Continue to Part 2 >>