Marco Hickey's  Instablog

As recently posted on my blog, I've been expecting a pull back; however the rally has continued, and the market has made a fool of me. The S&P 500 passed through the 1010 mark today on rather bad news, so maybe this rally is for real and will continue. However, I'm still cautious about purchasing stocks (unless I write a call option against it immediately), but for the calls written today and those which I'll write on strength Friday are certainly for higher strike prices (a more bullish approach). The majority of the strike prices indicated in this post are for the next higher strike option. With only 1 week until expiration I have outlined some "weekend write ideas", which is for selling the call against the stock for the August options expiration. To learn more about this strategy, and stock options in general click here. I will use the 25 largest stocks (by market cap) in the S&P 500 for my analysis, I will then write about 10 higher beta stocks which are much more volatile and you'll be able to compare premiums between the two groups.

To understand the table, I will give a detailed example of Google (GOOG) below.

Sell the Google August 470 strike call option. The return if the stock is assigned at expiration is 2.25%, and if the stock is not assigned the return from writing this is 0.58% (Also protection % or lowers the position by 0.58%). Based on the current options market, the contract will lose $56.80 (a gain of 25.2% on the premium) over the weekend as the stock sits inactive.

All data as of market close Thursday August 13, 2009.

Company	Ticker	Strike	Assigned Return %	Unassigned Return %	Weekend Loss
Exxon Mobil Corporation	XOM	70	2.41	0.60	8.20
Microsoft Corporation	MSFT	24	2.37	0.76	3.20
Wal-Mart Stores, Inc.	WMT	52.5	1.70	0.50	5.20
Johnson & Johnson	JNJ	60	0.71	1.24	5.20
The Procter & Gamble Company	PG	52.5	1.43	1.05	6.80
International Business Machines Corp.	IBM	120	1.44	1.09	16.00
AT&T Inc.	T	26	2.59	0.55	3.00
Apple Inc.	AAPL	170	2.03	1.09	27.60
JPMorgan Chase & Co.	JPM	43	2.40	2.17	11.00
Google Inc.	GOOG	470	2.25	0.58	56.80
Chevron Corporation	CVX	70	2.55	0.41	6.80
General Electric Company	GE	15	6.81	0.43	2.20
Cisco Systems, Inc.	CSCO	22	2.93	0.65	3.20
Bank of America Corporation	BAC	18	6.88	1.00	4.40
Wells Fargo & Company	WFC	28	2.69	2.26	7.40
The Coca-Cola Company	KO	47.5	0.69	1.97	5.40
Oracle Corporation	ORCL	22	1.50	1.46	3.60
Intel Corporation	INTC	19	1.52	1.78	3.20
Pfizer Inc.	PFE	16	2.34	1.08	1.00
Hewlett-Packard Company	HPQ	45	3.27	1.80	11.80
Philip Morris International Inc.	PM	47	1.87	0.65	5.20
Verizon Communications Inc.	VZ	31	1.26	1.39	4.40
PepsiCo, Inc.	PEP	57.5	2.28	0.50	5.80
Goldman Sachs Group, Inc.	GS	170	3.77	0.41	19.20
QUALCOMM, Inc.	QCOM	47	1.98	1.07	7.40

As promised below is a list of 10 higher beta stocks. As you can see the more volatile the underlying stock, the greater the: return %, protection %, and loss the contract loses over the weekend.

 

Company	Ticker	Strike	Assigned Return %	Unassigned Return %	Weekend Loss
Las Vegas Sands Corp.	LVS	14.00	13.03	5.75	8.80
MGM MIRAGE	MGM	9.00	6.96	4.33	5.20
Teck Resources Limited	TCK	28.00	5.18	3.03	12.00
Genworth Financial, Inc.	GNW	9.00	6.06	3.20	4.20
American International Group, Inc.	AIG	26.00	8.95	5.04	18.20
Wynn Resorts, Limited	WYNN	60.00	3.37	4.81	27.20
Barclays PLC	BCS	25.00	6.22	1.18	6.20
Citigroup Inc.	C	4.00	3.20	4.68	0.80
Ivanhoe Mines Ltd.	IVN	10.00	14.65	2.80	5.80
Palm, Inc.	PALM	14.00	6.49	3.17	6.60

To better understand options in general, including this strategy, these percentage calculations, and other option strategies click here. As an owner of Bank of America, Citigroup, Goldman Sachs, Ivanhoe Mines, Las Vegas Sands, and Palm shares, I've written and traded many of these option ideas for the August options expiration. I will look to write out some more shares of Bank of America Friday on strength, especially after that huge day Thursday. These 6 stocks listed above are more volatile than many of the stocks listed in this article, and although they are more risky, they are much better for this strategy.

To reiterate a previous blog post: As the Volatility index is creeping back up, call option premiums should increase in value overall, protecting and giving an even higher return. I use this strategy to write my shares out on strength, and purchase them back on weakness (if I am profitable). For example: using this strategy has allowed me to cost average my position on Caterpillar down to $4.88 a share. Patience is the key to succeed with this strategy. If the stock gets called out, and you miss some of the upside, you can always use the buy/write option strategy to get the stock back for the following month. With the VIX at historic highs and call premiums exploding, selling deep in the money covered calls on my shares from September to December allowed me to trump the market, and actually make a profit.

All of these options expire on August 22; therefore the last trading day is Friday, August 21, 2009.

These are just examples and are not recommendations to buy or sell any security; if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.

Keep in mind when using this strategy it is essential that broker commissions are low enough to profit from the position.

Disclosure: Long BAC, CAT, C, GS, IVN, LVS, PALM, Short BAC August 18 Call options, CAT August 45 Call Options, C August 3 Call Options, C August 4 Call Options, IVN August 7.50 Call Options, LVS September 11 Call Options, Palm August 15 Call Options