Favorite Option Strategy

You Have Your First Stock What Is Next?

Let’s suppose you saved up $10,000 and purchased 100 shares of that boring food stock.  You sold a covered call for two months out.  You now have some money left over, and you have at stock with a dividend for 3% and with the covered call you got an additional return of 3% after it expired.  You have 2 options.  You still have enough to buy another stock choice 1.  Or do my favorite option strategy choice 2. 

Of your original $10,000 you have anywhere from $6,000 to $4,500 left over.  You decide to see how the covered call works and save a little bit from your paycheck to prepare to make your second purchase. 

So in choice 2 you decide you liked it when the call expired as worthless.  You got cash for holding the stock.  I have heard 90% of all calls and puts do expire as worthless.  I have heard that of the 90% that do not get exercised, some expire as worthless and some are purchased back.  Either way you always make money selling calls and puts.  This is a conservative strategy designed to lower your market risk as long as you would like to own the stock anyway. 

You also like the stock you purchased.  If it goes up say 10% you would sell it and buy more on a pull back.  If it goes down you’d like to buy another 100 shares.  You sell two options and put and a call on the same stock.  The put is at a lower strike price to where it is trading and the call is at a higher strike price to its current price.  In choice 2 you have now taken in some money and you will automatically buy the stock if it drops and sell the stock if it goes up.  You collect the dividend as you wait to see what happens.  So in this choice you make money if the stock goes up, down or nowhere at all.  If for some reason it goes down you can sell 2 covered calls.

The result you have a safe boring stock.  You are collecting the dividend.  You are collecting premium selling options against your position.  And, you only have to watch the market and economy as a whole and 1 stock.  Next post I will explore choice 2 and recommend a second safe boring stock with a nice dividend.  After you have a diversified portfolio of boring safe dividend stocks we can talk about growth stocks.