Sell Calls Against Your Long-term Long Stock Positions
by Houghton and Atkeson 10/16/08
Options volatility is hitting all-time highs again -- the CBOE Volatility Index (VIX) has been above 80 today.
Big Money Options believes buying puts and calls is very expensive. We would rather be a seller of volatility than a buyer in this market.
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In your long-term stock portfolio, you should consider selling way out-of-the-money calls against those positions, which is covered-call writing. This should put a few dollars in your pocket, and it presents very little risk to you.
The risks you face, however, include having the stock rebound sharply and having it called away at expiration because the price of the stock is above the call's strike price. But that's not all bad, as you can imagine.
And if your stock continues to decline, this would have happened anyway to your long-term holdings but now you will have collected some call premium to alleviate some of the pain.
Related Story -- "Investors Say They Like to 'Talk to Chuck'"
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Looking into June, the market should begin refocusing on upcoming earnings reports for evidence the economy is gaining momentum.
Watching the Treasury's Actions
In the short-term, the government's bond auction is likely to be a key driver of stocks.
Treasury Auction Boosts Market
The Treasury's auction of two-year notes brought an upside surprise which should alleviate fears of a lack of demand for U.S. paper.
Credit Markets Point to Upturn
The credit market, a reliable indicator of equity direction, suggests we will break out of the SPX's trading range to the upside.
The market seems to be saying that a 30% move up from the lows is ahead of the real economy and the market needs to allow the economy to catch up.
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