I have decided to focus more of collars for the month of November (see my list of options from last week's question.) Three main factors influence my decision. First, the market seems overbought and it is hard for me to believe it will hold up all the way out to November 21. Even calls written in-the-money (NYSEARCA:ITM) might not hold up through a pullback. Second, many of the stocks I am following have earning reports before Nov. expiration, which increases volatility and surprises. So far the trend has been very unkind to companies with poor reports. Third, the elections are also coming up right in the middle of it all. I have been searching out stocks without earnings that are not overbought, and it is not an easy task at the moment.
Therefore my plan is to put up to half of my portfolio into collar trades. This allows me to be in the market with a downside hedge, and I can hedge each position as I go. What I will generally do is buy an April put slightly out-of-the-money (lower than the stock price) and sell a call slightly out-of-the-money. The goal is to use the call income to pay for the put in less than three months, leaving three months to write calls with free downside protection. A variation is to buy a January put and write weekly calls on a stock, such as I set up on BIDU on Friday. I don't want to lock my whole portfolio into collars, because I want to buy a possible dip and take advantage of opportunities as they come after earning. I also don't want to sit the month out in cash, since cash is losing about 2 percent in value every month right now.
I have to wait for trades to settle, which gives me a couple days to get my trades in order. Expect Thursday and Friday to be very busy trading days. I currently have three trades on, the VMW collar left over from last month, the BIDU collar using weekly options, and a VXX weekly covered call due on Friday.
Here is my question for this week:Is anyone using weekly options in their IRA? I am intrigued with writing covered calls on them, and some collars. The premiums are very high, and you can quickly pay for the put and earn income with free protection. I like the idea of buying the 3 month out put and writing 12 calls against it. What do others think of this idea?
Disclosure: Long BIDU