Here are two main reasons many investors don't use stock options:
- Options can seem complicated.
- Advanced options strategies might require special permission from your broker.
I'm not going to pretend that options can't be complex, but, like anything else, options are only as complicated as you make them. The good news is that more complicated options strategies don't imply fatter returns. Sometimes writing puts (a simple options trade) can put a juicy chunk of change in your pocket while your know-it-all neighbor's iron condor (a complicated options strategy) gets shot out of the sky.
While most brokers must grant permission for advanced options trades, most investors can easily obtain basic options trading permission. With this in mind, I offer four simple options trades that almost anybody can make today.
1. Write puts on Johnson & Johnson
Health-care juggernaut Johnson & Johnson
The recent volatility in this normally staid stock has also driven up premiums on its options. Today, you can write July 2011 $67.50 puts for a $1.42 premium. If the shares are over $67.50 on July 15 -- just over a month from now -- you keep the $1.42 per share, which translates to 25% annualized return. If the stock is under $67.50 at expiration, you end up with shares at the attractive net purchase price of $66.08 per share.
2. Write covered calls on Activision Blizzard
World of Warcraft creator Activision Blizzard
The August 2011 $12 calls in particular look attractive: If shares are below $12 in August, you keep the $0.34 option premium (a 19% annualized yield at today's share price), then you can repeat the same trade with a later expiration. The downside to this trade is that you would limit your upside if the stock were to go on a tear in the next two months. But if you think that is likely, you can simply buy the stock or consider writing calls on just half of your shares.
3. Buy LEAPs on Intuitive Surgical
Investors in Intuitive Surgical
If you believe in the market opportunity, one strategy is to buy LEAPs (long-term equity anticipation securities), which are call options with long-dated maturities. For $57.05 per share, you can buy January 2013 $350 LEAPs. The stock must close above $407.05 in January 2013 for you to break even, but anything above that is a leveraged gain. At $500 a share, for example, the return on the LEAPs would be 163%, versus 46% if you just bought shares today. And in case of a downturn, your loss is limited to the $57 you paid for the LEAPs.
4. Write puts on Intel
If you are reading this from a computer, the chips powering the system are probably from Intel
Start simple, then work your way up
Options needn't confuse or intimidate investors, especially when even simple strategies can offer investors attractive opportunities. Of course, the more familiar you become with options strategies, the better you equip yourself to profit from almost any market situation.
For more ideas -- including more complex strategies, if you want them -- and education every step of the way, you might want to consider joining Motley Fool Options, which is opening for a limited time. For more information on Motley Fool Options, including an entirely free trial, simply drop your email in the box below. Happy options investing!
Alex does not own shares or hold options positions on any of the stocks mentioned. The Motley Fool owns shares of Johnson & Johnson and Activision Blizzard. The Fool owns shares of and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson, Intuitive Surgical, Activision Blizzard, and Intel. Motley Fool newsletter services have recommended creating a diagonal call position in Johnson & Johnson. Motley Fool newsletter services have recommended creating a diagonal call position in Intel. Motley Fool newsletter services have recommended creating a synthetic long position in Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. 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.