If momentum-led markets have shot stocks well below or above your personal buy targets, options provide an easy way to take advantage and earn some extra income.
I see two basic opportunities: 1.) Selling or "writing" "Covered Calls" on stocks you own that now trade above buy targets, and 2.) Writing "Put" options on beaten down stocks you should own.
Call options convey the right to buy 100 shares of a stock at a set "strike" price by a specified date. Put options convey the right to sell 100 shares at a set strike price by a certain date. The value of the call increases as the price of the underlying stock rises; the value of the put increases as the stock's price falls.
When you write options, you get the opposite result. A covered call's value will fall to zero if a stock does not rise before it expires. You pocket the entire price or "premium." Conversely, a put's value goes to zero if a stock's price doesn't fall to its strike price by expiration.
If a covered call moves against you, the worst that can happen is you'll have to sell the stock at the strike price. If a written put moves against you, the worst outcome is you'll buy the stock at the strike price.
Energy Transfer Partners (NYSE: ETP) is a strong candidate for writing a put option, whether you already own this master limited partnership or not. Management is buying Sunoco (NYSE: SUN), which it will then combine with assets of the former Southern Union now held by general partner Energy Transfer Equity LP (NYSE: ETE) in a 40-60 partnership.
My recommended option to write is Energy Transfer Partners December $42.50 Put (Symbol: ETP121222P42.5, Limit Order Price: $1.90 or more). That's a premium of $190 per option sold. Note that in retirement accounts you'll need to put up the full cost of buying 100 shares when you write the put, which will be $4,250.
If the unit price falls and the put is exercised, the worst that can happen is we'll buy this MLP at $42.50, a 5% discount to where it trades now. If not, we'll pocket the full premium.
Warning: The option price in this trade recommendation is as of 07/13/12 and will likely have changed by the publication date.