Here is a strategy that works well for low priced equities. We now have many many to choose from. Bear in mind here that the worse case scenario is for the underlying to go belly up and stop trading in that equity. Since the advent of the ETF's, this is not so much a problem. For this reason I particularly like this strategy.
Example: we have UYG trading for about 5.25. If we were to sell Feb 4 puts and collect .35 we would have a gain of 14% (250.00 margin required) If the stock is above 4 by the 3rd Friday in Feb, this will expire worthless and I pocketed the 35 already. If the stock is say 3 by then (or a week or so before ex date) we can buy the option back for a significant loss (possibly the price would be 1.20) but then we sell the March for a gain (possibly sell the March for about 1.40) We continue to do this until some day the stock does close above 4 and our position expires worthless.
If you are in love with the underlying, you can always take assignment and sell calls against the long equity you own.
I have done this strategy for over 15 years. It is a good cash generating strategy.
Virtual trade it and see.
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2 comments:
what other cheap etf do you have?
URE, UYG, XLF, these are a good start. One thing you want to look at is the underlying and where it is going. Even a 10 ETF, you could sell a spread and accomplish the came thing.
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