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Strategies & Market Trends : Calls and Puts for Income -- Ignore unavailable to you. Want to Upgrade?

To: skinowski who wrote (4589)	8/22/2010 6:50:18 AM
From: dealmakr	Read Replies (1) \| Respond to of 5891

Hi skinowski, This type of trade works best with a market that is in an overall neutral to slightly bullish bias. In selecting a stock, I look for one that has gotten beaten up and fallen from favor on the street, but maybe is in the process of changing the business model like WFR is doing with Sun Edison. Having a good bit of cash on the balance sheet also is another factor as this gives the company some support and the capability to survive the downturn. When WFR announced a buyback it gives it just a bit more support also. Options volatility and the amount of premium that can be written against a position carries a lot of weight on how to deploy capital either to buy the stock for a CC write or use capital for writing naked puts. WFR did meet this as the vol stayed fairly high after the drop in May, but has now come in. In managing the entire position, sometimes there is the tendency to become overleveraged on one side which can go against you quickly if the market sells off rapidly or good news hits on the long side, so I try and be flexible as to the amount of risk I am willing to assume given the stance of the market at that time. For now with the market looking sick, the risk is higher for a decline and the premium that is available on the put side doesn't justify the assumed risk for short term writing of puts on this stock. In writing CC's at 11 even with the stock bot higher, I am willing to lose the position if called away and will make some dough on options premium that has been written and closed. Overall in looking at the entire trade history the return would have been better if many of the options were allowed to expire, but when the crystal ball gets cloudy reducing exposure seemed to be the best strategy. PFE is one that I have done this with in the past also especially around dividend time. With a 4.5% yield on the dividend, it makes holding the long side a bit less painful if the entry time is wrong and you get paid a bit to wait for a turnaround. Also take a look at longer term options and not just the front month as you could have a better opportunity for returns overall with increased premium received and reduced entry levels on the put side, maybe split your writes over a shorter/longer term timeframe. I just won't take any longer term positions on leveraged ETF's due to their nature to lose money over time, great to trade very short term, but thats just me. A few others that I am currently trading around with this style are BRCD & SMOD both near the 5 strike, BAC & GE on the weekly expirations. Good Trading dealmakr