N.B.--For illustrative purposes only!
Volatilities are high currently compared to historical levels, so the object of any trading strategy would be to capture (ie, sell) this bulge. Any strategy has to stand on its own merits, but the hope is to catch a lowering of volatility after a position has been put on. First off, you have to make a decision about how you feel about the market in general and the particular stock in question. Let's posit you are neutral to slightly bullish about the market and think BCE will remain level or rise in the next 1 to 3 months. Remember, this is only an illustration, not a recommendation. The most basic play is a covered write, buying 1000 BCE @ $40.40 and selling 10 Feb 42.5s at $1.75. (The 52-week high for BCE is $44.25...and 42.50+1.75=44.25). So let's say you're right, and BCE goes to about $41.50 and stays there through expiry--you make $1100 on the stock and $1750 on the options, less commissions of course. (Did someone say discount broker?) The beauty of options is you can fine-tune your position...let's say you think BCE won't take out its highs between now and Feb expiry, so you sell 15 calls. You've increased your risk on the upside but lowered it on the downside. The trick is, you have to have discipline--pick a lower limit you think Bell should hold, and if it breaks that, take the position off immediately. The old saw...cut your losses and let your profits run. It is easy to say but hard to do; in fact most people, (myself included) do the opposite.
Whew. I didn't mean to get into a lengthy dissertation. (I could have gone on to diagonal calendar spreads). If you're a serious options player and don't already own it, I strongly recommend "Options as a Strategic Investment" by Lawrence MacMillan. Not easy reading, but when you get through it, you'll have all the theory you'll ever need. The rest is putting it into practise.
No options update today because not much happened today.
Happy trading.
Porter |
