As a follow-up to "Part 1," I outlined a covered call strategy for conservative investors. Investors looking to take chips off the table into a turbulent 2012 should look at a cash secured put strategy. After a volatile 2011, major indexes close to positive for the year. I am using this opportunity to overwrite calls and sell cash secured puts on existing positions.
Investors can sell equity positions and replace the exposure with a cash secured put option. I believe investors should remain cautious in early 2012 as the European debt crisis unfolds.
I utilize this strategy to build exposure to specific names I want to hold long-term, while at the same time seeking to build “margin of safety.”
I define the margin of safety as:
(Current Stock Price minus Strike Price) + Premium Received for Option
I am looking to simultaneously (i) sell equity position and (ii) sell out-of-the-money put options. This transaction will generate option premium cash flow. I am looking for put options with expiration dates of approximately six months.