Marco Hickey's  Instablog

As stated in Is it Time to Put the Banks in Place? Using Put Options to Purchase Stocks I outlined some ideas I may be using to sell put options on the hottest stock sector, the financials. This is similar to that article, but this post is concentrating on the "hottest index", which happens to be the NASDAQ. To reiterate my previous blog post: The activity in the Volatility Index [VIX] is hinting at a short term sell off in my opinion, not to mention I don't want to be completely long before Friday's unemployment number, nor after this market runs out of "earnings steam". However, I am bullish long term (and who knows if the market will react good after earnings season is over and if it rallies on the unemployment data etc...). I would like to get into these companies for less (on weakness), which makes this type of strategy ideal for this type of speculation, and instead of waiting on the sidelines with a stock limit order, it will allow for me to participate in the market in case this rally keeps in going.

In this article I will write about the top 20 stocks in the NASDAQ 100 (by market cap) using this strategy. If you'd like to learn more about this type of strategy or more about options in general check out my blog or options trading E-Books here. I'll also write about using this strategy on three popular Tech ETF's following my analysis of the twenty companies.

All data as of market close Wednesday August 5, 2009.

HOW TO READ THE TABLE

NOTE: When using this strategy, I first decide what I am willing to pay for the stock. Let's keep it simple and say I'm willing to buy the stock/ETF at a share price of 7% lower.

Price: The most recent closing price (last quote price) for the stock
7% Lower: The price which I am willing to pay for the stock which is 7% lower than the closing price
Strike: The closest contract strike price to the 7% lower price. It may be slightly higher or slightly lower than the 7% lower price.
Prem.: This is the theoretical premium received from selling the put option
Adj. Cost: This is the adjusted cost for the stock, if you do happen to end up with the shares at expiration.

The first stock listed in the table below is Microsoft (MSFT). An example of this option strategy on MSFT would be interpreted as:

Sell the Microsoft (MSFT) September 22 put option. This will currently give you $0.61 a share. If Microsoft expires above the indicated strike price of 22 you profit 100% of the premium received, if not your cost per share of the stock is $21.39, 10.16% lower than the close price and 2.77% lower than the price I was willing to pay of $22 a share. This strategy allows you to profit if:

• The stock continues to move up over the next 44 calendar days
• The stock moves sideways over the next 44 calendar days
• The Stock sells off, but by less than 10.16% by option expiration

Company	Ticker	7% Lower	Strike	Prem.	Adj. Cost
Microsoft Corporation	MSFT	22.14	22	0.61	21.39
Apple Inc.	AAPL	153.55	155	3.32	151.68
Google Inc.	GOOG	419.56	420	5.6	414.4
Cisco Systems, Inc.	CSCO	20.60	21	0.32	20.68
Oracle Corporation	ORCL	19.94	20	0.23	19.77
Intel Corporation	INTC	17.54	18	0.47	17.53
QUALCOMM, Inc.	QCOM	42.60	43	0.97	42.03
Amgen, Inc.	AMGN	57.95	57.5	2.1	55.4
Teva Pharmaceutical Industries Ltd (ADR)	TEVA	48.76	50	0.73	49.27
Research In Motion Limited (USA)	RIMM	74.21	75	2.74	72.26
Comcast Corporation	CMCSA	14.01	14	0.45	13.55
Gilead Sciences, Inc.	GILD	43.53	44	0.85	43.15
Amazon.com, Inc.	AMZN	78.39	80	2.8	77.2
eBay Inc.	EBAY	20.10	20	0.46	19.54
News Corporation	NWSA	9.84	10	0.52	9.48
Dell Inc.	DELL	12.68	13	0.52	12.48
The DIRECTV Group, Inc.	DTV	23.96	24	0.55	23.45
Celgene Corporation	CELG	52.55	55	2.05	52.95
Infosys Technologies Limited (ADR)	INFY	41.36	40	0.88	39.12
Costco Wholesale Corporation	COST	45.63	45	0.5	44.5
Technology SPDR (ETF)	XLK	18.35	18	0.17	17.83
ProShares Ultra Technology (ETF)	ROM	35.58	35	1.27	33.73
Direxion Daily Tech Bull 3x Shs (ETF)	TYH	107.72	110	8.55	101.45

All of these options expire on September 19; therefore the last trading day is Friday, September 18, 2009.

I have been using this strategy to purchase my shares and I find it has been working well. It's a bad idea to use this strategy as a form of speculation, in other words selling a put for the premium just because you think a stock will never get to a lower strike by options expiration. Remember even if the stock goes to $0 a share, you're still obligated to buy it for the indicated strike.

It is important to note that if the stock is below the indicated strike at expiration, and you don't want to take the shares into your portfolio at that point, you can purchase the put contracts to close the position, and sell a similar strike (usually I sell the same one) for the following month (known as rolling).

The reason option volumes have surged in the last 5 years is because they are a great way to hedge your portfolio as well as create income off of your shares (see CBOE option volume chart here).

These are just examples, if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.

Disclosure: Long GOOG