The market should continue to be volatile as Europe works through its massive debt issues. I can easily see scenarios where the market has major corrections and rallies only to end the year close to where we are now. One of the strategies I am using to leverage this volatility to my advantage and get decent returns in this environment is using put options. Specifically, I am selling slightly out of the money puts on stocks that have rock bottom valuations and solid technical support. One stock that meets that criteria and provides a great option return is Blackstone (NYSE:BX).
Option Strategy: Sell the December 2012 12 puts on BX for $1.50.
- Outcome 1: Blackstones stays above $12 at expiration of option on December 22nd and the investor picks up the $1.50 premium for an annual return of over 24%.
- Outcome 2: BX dips below $12 and the stock gets "put" to the investor for a cost adjusted $10.50 ($12 - $1.50).
4 reasons Blackstone is unlikely to go below $12 a share for any length of time:
- Blackstone sells for just 6 times forward earnings, a steep discount to its historical average (16.9).
- The stock should pay out at least five percent this year, which should put a nice floor under the stock.
- The 13 analysts that cover the stock have a $18 median price target on the stock. Barclays also just upgraded to an "outperform" rating as well.
- The stock has good technical support at these levels (See Chart).
Disclosure: I am long BX.