A beautiful thing about options investing -- and as co-advisor of Motley Fool Options, I'll admit to some up-front bias here -- is the sheer breadth of opportunity to make money. Expect a stock to rocket? There's a strategy for that! Expect a stock to plunge? There's a strategy for that! Expect a stock to be flat and boring for the foreseeable future? There's a strategy for that!
My co-advisor Jeff Fischer and I search for businesses whose industry, prospects, and financials we understand. Then we formulate an up, down, or stagnate thesis, and overlay an option strategy that we hope will yield a profit.
We hold accuracy as one of our core tenets; the higher our accuracy, the more satisfied we believe you'll be with your overall portfolio returns.
Of the 28 trade sequences that have reached their natural end since we launched the service, a full 27 have resulted in positive dollar profits – an accuracy rate exceeding 96%! (Including positions that haven't reached their conclusions yet, our accuracy is 81%.) Here are a few of our favorite options strategies that you can put to use in your portfolio.
Spreading the secret sauce
When stocks look undervalued in light of known, identified catalysts, bullish spreads can be big winners. The idea is to buy one call option while simultaneously selling a call option with a higher strike price. You earn a leveraged profit when the stock ends up above both strike prices at expiration.
If you were looking to candidates to implement such a strategy today, you might look into automotive-safety-systems all-star Autoliv
I think the stock's a bit ahead of itself, but I also believe that Autoliv's valuation would increase with each passing quarter. A bullish spread -- buying the September 2011 $65 calls while simultaneously selling the September $70 calls -- would cost you about $3.50. If the stock stays above $70 through expiration, your profit would be $1.50, or 43% in six months.
You can also set up bullish spreads using put options – for example, you might look to Best Buy
Diagonalizing to profitability
A favorite strategy for cash-producing, slow-moving, fairly valued big blue chip companies is the diagonal spread. In this approach, you buy a long-term, deep in-the-money call option, then repeatedly write short-term call options against the owned call for income. Over a typical two-plus-year lifespan, you whittle down the net capital invested while retaining a valuable asset in the owned call. In the best cases, over the life of the owned call, you pull out enough cash from option writing to exceed the cost of the long-term option itself.
Operating-system and office-software behemoth Microsoft
The backbone of option profitability
Want to really goose your accuracy? Find a company whose industry dynamic or internal practices tell you it's unlikely to rise quickly, but whose downside looks limited. Then turn it into a covered-call income engine.
For example, consider video game retailer GameStop
Another idea in this vein is GPS maker Garmin
The Foolish bottom line
We like positive returns that put cash in your pockets. Options let us do so with myriad strategies, betting on stocks that go in any direction. If you'd like to learn more about Motley Fool Options or receive our free "Options Edge" guidebook for 2011, just enter your email address in the box below.
Best Buy and Microsoft are Motley Fool Inside Value recommendations. Best Buy and eBay are Motley Fool Stock Advisor selections. Autoliv is a Motley Fool Hidden Gems recommendation. Motley Fool Options has recommended writing covered calls on GameStop. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Autoliv, Best Buy, GameStop, and Microsoft.
Jim Gillies owns shares of, and has option positions, on Autoliv, Garmin, and GameStop. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.