Looking Forward for the week ahead, no one can say which way the market will move, what event might come (good or bad, remember Fukushima Daichi reactor meltdown), and the best way to take advantage of this is to produce income, and i am using positions in my portfolio that I'm currently long, instead of selling here, and possibly missing out on great returns.
Although i have skepticism, because every time i hear people come out and say we are about to be in a great bull market, and market high's will go higher, usually this means we are at a top, but pulling the sell trigger is just always so tough.
I have concerns about this market, at this price, and could see a 5-7% pullback in the coming weeks. By selling call options on long positions, it helps reduce the pain of the losses, but as I'm not a short term trader, I'm a long term investor, this is a way of collecting income in the short term, boost yearly returns, and if I'm taken out of positions, i usually do this at prices that I'm ok with selling at.
The first position i have in my portfolio is Google (GOOG). There is some positive news/rumors that could happen, with the possibility of Google opening up a store, and new phones/tablets that could be launched on the android platform, or it's core business (search advertising) to increase it's recent growth, but i think trading near all time high's (currently at $800), this isn't a bad place to produce some income.
With the stock trading near all time high's, I'm going to sell the April 20th 850 strike price call options, and collect the 9.20 premium. Bringing in $920/options contract, isn't a bad bit of business for 8 weeks away, and i bought into Google in the 500 range, so selling at 850 wouldn't be terrible (always told myself i would sell at 750 if it ever got back after the crisis, but have continued the ride).
The second position i would take advantage of the same strategy (selling call options), is Marathon Petroleum (NYSE:MPC) (currently trading at 81.50). The most recent purchase of my portfolio, has been on a tear over the last year, and would like to take advantage of that premium that is baked into it's options.
The July 20th $95 strike price is a bit farther out than i normally like to go, but it still gives me plenty of upside in case it continues to climb, and would be over a 50% gain of where i bought it in the $61 area if i am forced out of the position. The premium is 1.70 currently, which is not much, you could trade the 90's and collect 2.70/share as well.
The third position i would employ this strategy with, is the market's current red headed stepchild, Apple (AAPL). It seems range bound (at least for now), and without significant short term news, i don't see the stock falling back into the good graces of wall street until that news comes. There area also too many people who bought apple in the 550-600 range, so i see a lot of people selling when it gets back to that level as well, which will provide a ceiling. While I'm a long time apple bull (bought in low 100's during crisis, and 180 area, and 390 area, and 600 area on first leg of the pullback) i don't see anything changing in the next 2 months to push it up more than $100.
I am selling the call option on the May 18th 550 strike price (currently trading at $450), and collect the 2.48 premium. Even if there is good news regarding Einhorn vs. Apple, and we get a dividend increase, or apple decides to start using it's cash better than it is currently, or a new iphone, or multiple to compete against the many competitors it has at all the different sized screens, and different priced phones (domestically and internationally), I don't see Apple surpassing 550 level and start the climb back to the 600 level.
I'm going to do a couple contracts against a portion of my position, but not enough to have my whole position called away, just in case that near term news does come, i can still take advantage of that uptrend.
I am not going to do this with the other positions in my portfolio, as recent takeover news has re-surfaced about Joy Global (JOY), although the July $77.50 strike price collects a tidy 1.17 (not much, but pretty good considering it is a 23% gain to get us there(currently trading at $63)).
Hope these ideas help give you ideas on how to take advantage of this strategy.