Sane Bull US Indexes

Friday, July 24, 2009

My Strategy

First, there is an assumption that the reader knows something about the basics of trading, what a share of stock is and some basics of options. If you do not know anything about options, I suggest as a GREAT place to start!)

So here is what I do:
I buy a stock, (in 100 share multiples, i.e. 100, 200, 300 etc).
I sell a corresponding ITM (in the money) option. (I am basically planning my exit at purchase.)

For example:
Buy 100 shares of XYZ stock for 6.25.
Sell 1 contract XYZ AI for 0.70. (This is the front month contract for 6.00. For the example, assume that it is 25-35 days till expiration, since that is generally the amount of time left when I enter into new trades.)
Net cost is 5.55 plus commissions (about 10.55 for one contract. 4.95 for buying the stock, plus 4.95 +0.65per contract for the option sale)
TOTAL cost is therefore 565.55 for the position.

I am planning on the stock staying above 6.00 at expiration. I will then be "called away" (I am using a Call option after all!)
If this happens, I will sell the stock for 6.00 per share, for a value of:
595.05 (6.00*100 shares - 4.95 commissions)

Total gain over the space of a month here is:

Or a one month return of: 5.216% (29.50/565.55)
5+% in one month is not bad, in fact it is DANG Good! It breaks down to a 60+% annual return, and so the obvious question is what are the risks? That will be answered in the next post!

No comments:

Post a Comment