The mere mention of options can send shivers down the spine of investors who have only heard about them through the news. To be sure, when used imprudently, options can do a great deal of damage to a portfolio. But, when used prudently, options can be a valuable addition to an investor’s toolbox. Covered calls are probably the best starting point for adding options to your portfolio.
With implied volatilities having contracted by as much as 50% since March, and with stocks still up sharply from their lows, now may be the time to add more puts to your portfolio. This week, we screen for likely rank 1 puts to buy, looking for those that are based on rank 5 or 4 stocks (which also have a technical rank of 5 or 4) and which are underpriced according to our model. Our screening has come up with puts on Comtech (CMTL), DG FastChannel (DGIT), and US Bancorp (USB) among others.
There is a good chance that we may be in for some more volatility, at least for the next few months. If so, then the Long/Long Hedge, which consists of rank 1 call and rank 1 put purchases, promises to be a good bet. This week we review the performance of this hedge and present a sample of this hedge as a portfolio consisting of about $10,000 in call and put buys.
Equities have been on a tear of late, with the broad-based Standard & Poor’s 500 Index up in seven of the past eight weeks. Growing evidence that the financial sector may not be as troubled as many had thought has certainly helped fuel the rally, as has recent data that suggest that the economic downward spiral is starting to level off. The question on the minds of many investors now is whether we’re at the early stages of another bull market or in a bear market that’s destined to re-test the March lows. Indeed, this is a critical question for us, too, since our expectations for the market determine which options we write in our Model Covered Call Portfolio; the portfolio contains five options that expire this month and another five that expire in June. (See figure 1 on page 4 for a snapshot of our portfolio at the close of trading on April 30th.)
We believe that The Value Line Daily Options Survey offers the best tools in the business for the covered call investor. These tools include our unique set of covered call data, our covered call ranking system (our rank 1s have strongly outperformed the market), our daily top-200 Recommended Covered Calls, our flexible Option Screener and our Model Covered Call Portfolio. This week, we review these tools.
In as much as our rank order performance was mixed, the March 2009 quarter was hardly the best period for our option model. However, we can still point with pride to the fact that, in a difficult market environment, buyers of our rank 1 calls and puts scored substantial profits, and writers of our rank 1 covered calls beat the S&P 500 by 8.5%. We often stress that this is a market in which you definitely need to use options. And, we like to think that the Value Line Daily Options Survey offers invaluable tools for successful option investing.
This week’s report is a follow-up to our February 2, 2009 report, “What’s free (or almost free) from the Exchanges” (Ot090202.Pdf). This time around, we review what you can get for free (sometimes on a trial basis) from various commercial websites. Before you go and spend big bucks on software, data or training, you should see what is available for free. Often, these sites offer services that can be used in conjunction with The Value Line Daily Options Survey to help you with your option trading and portfolio management.
This is definitely a market in which you need to be hedged. The S&P 500 and the Dow are down about 11% over the past month and only about 2% above earlier January lows. On the other hand, some stocks are doing better than others. Value Line’s rank 1 common stocks are down only about 3.5% as investors are tentatively looking for growth potential. In what may be a “stock picker’s” market, holding good stocks and protecting them with puts may be the way to go. In this week’s report, we cover in some detail how to hedge stocks you own with puts. Even when markets are volatile (as they are now), you can tailor your put insurance to suit your expectations and your tolerance for risk.
One lesson from 2008 is clear: you are a lot better off if you know how to use options than if you don’t. One of the best ways to start leaning about options is to check out the various services offered by the option exchanges. Even experienced option investors should review the ever expanding list of training and information services offered by these organizations.
If you are already familiar with options (what they are, what gives them value, the terms that describe them and how they are traded), you can probably skip this chapter. However, if you are uncertain about some of the terms or concepts, this chapter will probably answer your questions. We start with some basic definitions.
Adding Options to Your Portfolio
The mere mention of options can send shivers down the spine of investors who have only heard about them through the news. To be sure, when used imprudently, options can do a great deal of damage to a portfolio. But, when used prudently, options can be a valuable addition to an investor’s toolbox. Covered calls are probably the best starting point for adding options to your portfolio.
Screening for Puts
With implied volatilities having contracted by as much as 50% since March, and with stocks still up sharply from their lows, now may be the time to add more puts to your portfolio. This week, we screen for likely rank 1 puts to buy, looking for those that are based on rank 5 or 4 stocks (which also have a technical rank of 5 or 4) and which are underpriced according to our model. Our screening has come up with puts on Comtech (CMTL), DG FastChannel (DGIT), and US Bancorp (USB) among others.
A Sample Long Long Hedge
There is a good chance that we may be in for some more volatility, at least for the next few months. If so, then the Long/Long Hedge, which consists of rank 1 call and rank 1 put purchases, promises to be a good bet. This week we review the performance of this hedge and present a sample of this hedge as a portfolio consisting of about $10,000 in call and put buys.
Updating Our Model Covered Call Portfolio
Equities have been on a tear of late, with the broad-based Standard & Poor’s 500 Index up in seven of the past eight weeks. Growing evidence that the financial sector may not be as troubled as many had thought has certainly helped fuel the rally, as has recent data that suggest that the economic downward spiral is starting to level off. The question on the minds of many investors now is whether we’re at the early stages of another bull market or in a bear market that’s destined to re-test the March lows. Indeed, this is a critical question for us, too, since our expectations for the market determine which options we write in our Model Covered Call Portfolio; the portfolio contains five options that expire this month and another five that expire in June. (See figure 1 on page 4 for a snapshot of our portfolio at the close of trading on April 30th.)
Using Value Line Options for Your Covered Calls
We believe that The Value Line Daily Options Survey offers the best tools in the business for the covered call investor. These tools include our unique set of covered call data, our covered call ranking system (our rank 1s have strongly outperformed the market), our daily top-200 Recommended Covered Calls, our flexible Option Screener and our Model Covered Call Portfolio. This week, we review these tools.
March 2009 Quarter Option and Covered Call Rank Performance
In as much as our rank order performance was mixed, the March 2009 quarter was hardly the best period for our option model. However, we can still point with pride to the fact that, in a difficult market environment, buyers of our rank 1 calls and puts scored substantial profits, and writers of our rank 1 covered calls beat the S&P 500 by 8.5%. We often stress that this is a market in which you definitely need to use options. And, we like to think that the Value Line Daily Options Survey offers invaluable tools for successful option investing.
What’s Free (or Almost Free) from Commercial Websites
This week’s report is a follow-up to our February 2, 2009 report, “What’s free (or almost free) from the Exchanges” (Ot090202.Pdf). This time around, we review what you can get for free (sometimes on a trial basis) from various commercial websites. Before you go and spend big bucks on software, data or training, you should see what is available for free. Often, these sites offer services that can be used in conjunction with The Value Line Daily Options Survey to help you with your option trading and portfolio management.
Buying Protective Puts
This is definitely a market in which you need to be hedged. The S&P 500 and the Dow are down about 11% over the past month and only about 2% above earlier January lows. On the other hand, some stocks are doing better than others. Value Line’s rank 1 common stocks are down only about 3.5% as investors are tentatively looking for growth potential. In what may be a “stock picker’s” market, holding good stocks and protecting them with puts may be the way to go. In this week’s report, we cover in some detail how to hedge stocks you own with puts. Even when markets are volatile (as they are now), you can tailor your put insurance to suit your expectations and your tolerance for risk.
What’s Free (or Almost Free) from the Exchanges?
One lesson from 2008 is clear: you are a lot better off if you know how to use options than if you don’t. One of the best ways to start leaning about options is to check out the various services offered by the option exchanges. Even experienced option investors should review the ever expanding list of training and information services offered by these organizations.
Defining Options Terms
If you are already familiar with options (what they are, what gives them value, the terms that describe them and how they are traded), you can probably skip this chapter. However, if you are uncertain about some of the terms or concepts, this chapter will probably answer your questions. We start with some basic definitions.