OPTIONS AS A SHELTER FROM TURBULENCE

Browsing into a magazine stand is one of my routines when I go to a bookstore. I used to start looking at the gossip celebrity magazines as this can clear my mind a little bit from daily job routine. After that I browse Newsweek, Time and Business Week. My eyes caught to the Special Edition of Business Week about Investment for 2008 that have publishment date on December 2007. It discussed about investment strategies and conducting interview to leading analysts. However, this is not make my attention get in through. Right in page 82, I struck with an article of Options as a Shelter from Turbulence……

To my surprise, the article does not discuss complex options strategy, but it just discussed about SELLING OPTIONS or WRITING OPTIONS. It stated that Covered Call can provide you big cushion when market is not going good. Well I must agree with this, since Covered Call Strategy is an Income Strategy from Options that will maximize overall return.

Say you have a blue chip stocks that went down due to the market condition. As we know, due to Subprime Mortgage Issue, market is “Bearish” and the FED is trying to use several monetary policy to tame it. As an individual stock, no matter how good is the fundamental, it usually affected by the market movement by around 60%-75% all the time.

Since that you have a good Blue Chip stock, do not sell your stock because of this condition. What you can do is Sell Covered Call Options. If you have 200 shares, you can do 2 lots of contract. Since the market is quite volatile, it is the time to REAP BIG PREMIUMS. Write on ATM (At the Money) positions, which the strike price usually have the biggest premium of Time Value. So, when your stock stays flat or decline a little bit, you will be covered by the rich premium from Covered Call. This is one of the excellent strategy if you own Blue Chip stock, you do not want to sell your stock and market is not doing good for you like now. If the market is still persistent trading in range, you can do Covered Call every month and still get the premium.

Someone will questions to you that if the market is rallying so you will loose opportunities for the capital gain and your stock will be exercised. Don’t worry……, there are many repair strategy that you can do such as Roll Over and Roll Up your position. And if you do on the right timing, you can even enhance your ROI. So, don’t worry about the market and do Covered Call to your Blue Chip stock portfolio.