Bryan Perry

Take Options Profits in STRIDES

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Typically when you're trading options and want to employ something more than a basic strategy such as buying a call or a put, you have to either "know your stuff" or have a broker who knows theirs.

However, you can make a multi-part trade in one single step. And this one doesn't even require you to have an options-approved account!

Callable Stock Return Income Debt Securities (STRIDES) are like purchasing an all-in-one Thanksgiving dinner package from your local supermarket. You get the main course (in the form of a play on the stock), side dishes (a bond and dividends) plus a dessert (an option strategy). But instead of leading to a tryptophan coma, this package deal can reward you for partaking of a veritable investment buffet in one trip.

To participate in a stock's potential upside, STRIDES use a short-term bond coupon that is married to an option strategy. These are Merrill Lynch (MER) products that serve as hybrid-types securities that are structured like bonds and that mature in a fairly short time frame (one to two years). Even better, they pay dividend yields, the target percentage of which is listed in its name.

For example, if you think JetBlue (JBLU) is about to take off, you may want to look into the Merrill Lynch's JetBlue 10% Callable STRIDES (STRIDE ticker: CSJB). Unlike "regular" options, which can trade on any combination of the six U.S. options exchanges, note that the JetBlue STRIDES only trade on the Nasdaq, as that is where its parent stock is listed.

But not all STRIDES show up on the Nasdaq (NASD). ExxonMobil (XOM), which trades on the Amex, has its ExxonMobil 9% Callable STRIDES (STRIDE ticker: MIX) listed on the Amex, as well.

The dividends you receive are based on the STRIDES and not on the underlying stock itself, as you don't technically own the stock and therefore don't receive the same rights as a shareholder (i.e., dividends, tender offers, voting rights).

Essentially, the STRIDE functions as a covered call strategy in which you are theoretically holding the stock and selling a call against it; in this case, Merrill Lynch is the call buyer and thus has the right to exercise the rights that owning a call gives them. As the call seller, so to speak, you are entitled to premium collected during the life of the investment.

Just like options, these "Callable" securities can be "called" away before their term is up. If Merrill Lynch makes the call, then you will not receive shares of the stock or any scheduled yields between the call date and the maturity date. If shares not called before maturity, then you would be issued stock in lieu of cash.

If the underlying stock should fall, Merrill can choose to redeem your STRIDE, whereupon you can receive shares, unpaid interest and interest that would have been due to you during the remaining life of the STRIDE.