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If A Medium Term Market Top Is Near – We Are Selling Calls

May 11, 2011 5:35 AM ET
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Seeking Alpha Analyst Since 2011

Serge Berger is the founder of the renowned www.TheSteadyTrader.com and the Head Trader at Blue Oak Advisors LLC. During his career, Serge he has been a financial analyst, dealt in fixed income instruments at JP Morgan, and was a proprietary trader in equity options and futures.
One of our core strategies for Bucket 3 (the longer-term holding portion of the portfolio) is to sell calls on stocks right after they had a large one day sell-off of at least 10%.  

The strategy is described in our Trading Plan.

Often when the stock market as a whole gets overextended we choose to use a similar strategy of selling calls, but in this case the calls are sold on high flying stocks gone vertical. Two reasons for this: 1) such stocks often have juicy option premiums, allowing us to sell calls far out of the money. 2) Given how extended those stocks are near term and how juicy the option premium it doesn't take much for these stocks to correct 5% and for you to keep a good part of that option premium.

We think a near to medium-term stock market top is near, although a rally up to S&P 500 $1440 should not be counted out beforehand.  If and when stocks should extend one last rally up we will look closely at selling good amounts of calls on much overextended high-flyer stocks.

Happy Trading

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