Chris, First, I want to make one point clear. You can have a perfectly safe portfolio without each issue being perfectly safe. The reason I mention that is most of the strategies I mention to you are risky, at least at first, on their own, but when you collect them in a basket, they are totally protected. That is why I may have a three legged position and put on two at once and then leg into another. That position is not perfectly safe, but it is only a piece of the total and the other positions have become completed and their safety net protects the new legging strategy. For example, let's say you have 10 $10,000 positions in this portfolio. If 9 are in place and locked in, the loss you might take legging into the last one is not enough to risk the total portfolio.
1. Spread conversions. Buy stock, sell Leap call, buy Leap put. This is a great strategy with these currently high call premiums on Leaps. See the Dell and Lucent spread conversions I talked about earlier in the thread. This is a very mildly bullish position. Usually, I take a down day on a stock I think has some near term upside, and buy the stock and sell the at the money call. The numbers are just humungous on these calls in many cases. Then, if the stock does indeed go up a bit, I buy an out of the money put. It is difficult to get a standstill average expected return of 10% with these, but, in point of fact, I usually make much more than 10% with early unwinds.
2. Butterfly Spreads. Again, I usually leg into these. Remember, though, that these require a cash collateral backing your position. Spread conversions do not. If a stock is at $50, you buy a $45 call, sell two $50 calls, and buy a $55 call. As a bear, I usually put on the credit bear spread first. I sell the $50 call, buy the $55 call. Then, if the stock goes down, I execute the bull spread portion, buying the $45 call, selling the other $50. These can also be done with totally debit or totally credit spreads. For example, buy a $45 call, sell a $50 call, sell a $50 put, buy a $55 put. That is debit. Credit would be, sell a $50 put, buy a $45 put, sell a $50 call, buy a $55 call. These things can kick out huge returns over several cycles. And if you leg in well, you can sometimes do them at no risk.
3. Regular old bull and bear spreads. I prefer credit spreads, where the most expensive option is the one I sell and the less expensive is the one I buy. With these, you have to have an opinion on a stock. MU is a great example. I would gladly sell $45 calls here and buy $55, for a credit of $5 or so, though I don't know if there still are any $55. Haven't looked lately. For a bull credit spread, you might want to look at short something like Incyte $30 puts and long the $20 puts. But always wait for a day that goes opposite your opinion. That really helps on these things. With these, you should have some balance in the portfolio. It doesn't have to be 50-50, but I wouldn't go below 75-25. The key is stock picking. If you have confidence in a stock to go the direction you predict, these can make you a ton of money. But I have had a few go against me and I cry a lot when that happens. Again, a portfolio of conversions and butterflies eases the pain.
4. Five Year T-Note covered call writing. It won't hit your 10%, but selling at the money calls against 5 year T-Note futures is a fairly safe way to add a lot of balance to your income portfolio without giving up a lot of yield. Right now, these things are giving you an extra 2-3% yield over T-bills.
5. This one isn't for the inexperienced. And don't bet the ranch on it. But CEF preferred stocks are yielding a lot more than bonds. They are all triple A rated and some, like Gabelli Convertible Fund Preferred (not a convertible preferred, so don't get confused) is a great credit. Not only does the preferred have 100% of a convertible fund backing its 15% position, but convertibles are safer than stocks. So, they should go with T-Bond yields and give you an extra 2 1/2% in the meantime. And, if you sell bond options against them whlle buying out of the money T-Bond puts, I contend you have a very safe, very high yield positon. My partners had a cow the first time they saw this spread, but it has worked nicely and 10% a year at low risk looks like a done deal.
BTW, the only negative with bond option plays is that the options are
all on $100,000 face amount. That is stiff for the portfolio you are talking about.
MB |
