Option Portfolio Tips for this Turbulent Market

Not since September/October 2008 have we seen market activity this volatile. Never have I seen more 4% plus moves in the SPX in a 2 week period in a long time. August 4 SPX -4.78%, August 8 SPX -6.6%, August 9 SPX +4.74%, Aug 10 SPX -4.4%, August 11 SPX +4.63%, and just as we thought the storm was over, August 18 SPX -4.96%. On August 4, after the first plus 4 % move, the SPX was 1200. Aug 18 SPX (after the 6th plus 4% move), SPX was at 1134. After all the fireworks and multiple 4 % moves, the SPX was down only 66 points. With all the terrific moves, you would think the market could potentially be at zero! This type of volatility unnerves most retail and professional traders. I want to throw out a few tips to keep you focused on your plan and ready to act! Today I will focus on the long term part of my option trading portfolio. Future blogs I may discuss the other parts of a complete options portfolio, monthly income and speculative.

Long Term or Retirement part of your portfolio– This portion of one’s option portfolio usually consists of bullish trades like covered writes and diagonals for bringing in monthly income. Though there are numerous strategies like bullish calendars, butterflies, and Iron Condors that also can be utilized in your retirement account for monthly income.

Tip-  Have a prepared shopping list of stocks you like and prices you wouldn’t mind owning the underlying at. AAPL is close to 360 as I speak. On July 25 it was over $400. If I would be comfortable owning AAPL at $304, I might use recent down days to sell an inflated put like the October 315 put at $11. This would obligate me to buy AAPL at $304 if I got assigned. Not a bad price considering the stock is at ~$360 today. Remember, this is for the long term part of your portfolio, don’t live and die on every AAPL down day. You are in this because you like AAPL long term, right?

Tip- Covered writes with stock can yield about 1-2 % per month when they work. One way to potentially double your yields with covered writes is to do Diagonals or covered writes with all options. With AAPL at around 360 as I speak, an example would be to buy 1 in-the –money January 290 strike call for $84 and sell 1 October 365 call for $24, a debit of ~$60 dollars . Because this would cost substantially less than a covered write with stock, the potential yields are much higher. The long January 290 call I bought has a delta of about 81. This means that the January 290 call I bought at $84, would increase to about $85.81 if AAPL stock increased $1.

Conclusion: Don’t let the market control you! Have a plan for each part of your complete options portfolio. Have a list of stocks you’d like to own and the prices you are comfortable with. Selling puts is a way some people use to accumulate stock at cheaper prices than they currently trade at. The downside is that if the stock doesn’t trade as low as the strike of your short put but instead runs up quite a bit, you’ll wish you just bought the stock or an in-the-money call option instead. Big investors like Michael Dell and others have used short puts as a source of monthly income and an effective way to accumulate stock. You prepare for war in times of peace. Make an options trading plan and stick with it!

Have a great weekend!  

Dan Sheridan