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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Mattyice who wrote (39337)	9/18/2010 5:24:17 PM
From: E_K_S	Read Replies (2) \| Respond to of 78765

Hi Matt - Re: GFRE Buy/Write strategy - An easy 20% return? I always like selling covered calls. Therefore, if you think the stock is cheap at the current price (@$6.90/share), you could buy the stock and then sell the January 2011 $7.50 call for $0.80/share. You would book a total of $0.60/share on the stock gain and $0.80/share on the call premium. Assume that the stock closes above $7.50/share in January 2011, your net gain on this call write strategy is $1.40/share. That's a 20% return in four months or a 60% return annualized. You give away the upside but do lock in the call premium and can sell the stock and/or the option again in January 2011 if it is below $7.50/share. I noticed somebody did this in size for the April 2011 $12.50 calls. It looks like they sold 7,000 contracts to open for $0.20/share. The activity may have something to do with option expiration Friday and could be a hedge on the April 10 2011 calls which have an OI of 7045 contracts. The key on a low risk Buy/Write strategy is (1) you are able to buy the stock at a value price, (2) there is option activity that allows you to sell out of the money covered calls at better than fair value prices and (3) there is a good chance that the stock will be called away at the strike price where the covered call was sold. The downside is if the stock tanks in the short period due to company specific "negative" information. Many times I will use this strategy to generate income as I am accumulating a long term core position. When the opportunity presents it's self to sell an out of the money call that carries good premium on a position I own, I will sell the covered call. If during the period the stock drops significantly due to "non Company" specific reasons, I will buy more shares equivalent to the calls I already wrote. Thus I now have doubled my initial position and have 1/2 of my shares hedged with decaying covered calls. I have been doing this on MPW (Medical Properties Trust Inc.) selling the October $10 calls. The stock has bounced around from $9.00/share - $10.25/share (my avg cost is around $9.50/share) and also pays an 8% dividend QTR (Sep,Dec,March & June). If my Oct $10 calls expire worthless, I will re-sell the April 2011 $10.00 calls now selling around $0.70/share. During the period from my first Buy around $10.00/share (sold the Oct $10 calls for $0.55/share), I subsequently bought more shares at price(s) $9.30/share & $9.63/share. I also did this on GOV (Government Properties Income Trust) until my entire position was called away in May at $25.00/share. I am thinking of re-establishing the position if GOV sells below $25.00/share. The dividend is 6.6% when priced at $25.00/share. I like to put on a call/write position for (1) stocks that pay dividends, (2) sandwich the strike month after the xdividend date and (3) the stock must meet my "Buy" value criteria for the sector and/or company special situations. SVU may be another one that fits this criteria. finance.yahoo.com It's not an all or none strategy. The Buy/Write strategy can complement a long term hold....waiting for your value buy to blossom. It can "juice" your over all return. EKS