In the course of writing the PowerOptions blog we often find ourselves discussing news events and signals indicating a stock will move up or down. Rarely have we focused on the best way to exploit a position once we have a strong hunch on which way the underlying equity will go.
Audio Podcast:
An audio podcast of this article is available at: poweropt.com/podcasts/2007_08_21_Strategy.mp3
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Is the most profitable way to invest in a stock you suspect will go up to simply buy the stock? If you were sure the stock were going to go up, one of the most profitable ways to invest in a stock (percentage wise) would be to buy a naked call (just buy a call option). But in investing, nothing is for sure and you can lose 100% of your money with a naked call.
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An investor might also choose a spread trade. These are a little less risky than a naked position because they offer some downside protection with limited upside potential profit. However, the payoff with this type of trade can also be huge; sometimes in the 50%, 60% or even higher range. But, again, an investor can lose all of their money this way if the stock goes beyond the value of the limiting option’s strike price.
One of the safest, if not the safest, option strategy is the covered call. This is similar to buying a stock, except it offers limited potential profit (in theory buying a stock offers unlimited upside potential) while offering the investor some downside protection. This means a savvy investor can make money in flat and even down markets.
The question, however, remains as to how an investor can choose the right risk level and the right trade for the stock. Well, you could buy a book on options investing and learn all of the trading and valuation formulas; actually this is a pretty good idea and the PowerOptions website has some great recommendations on our recommended reading page (poweropt.com/psProducts.asp.. After reviewing the material you could set up an excel spreadsheet with the calculations and pour over stock and options quotes for hours looking for the most attractive trading strategy and position.
The smart investor, at least in our view, would simply log on to the PowerOptions site and search for the trades using one of our award winning search tools. It just so happens the Strategy Search Summary Tool is perfect for this function.
The Strategy Search Tool allows a user to perform a search by filling out the desired stock, month and strategies they think best to explore (and don’t worry, there are 20 strategies to choose from). This search generates a list of the potentially profitable trades for the stock and month specified. From here, the user can choose which trade they find most desirable. The user also has the ability to generate a profit loss chart and add the trade to their individual trading portfolio.
This is all the things a trader needs to make the most of their hunch: it’s quick, easy to use, and allows the user to sort through the returned data in innumerable ways.
Let’s look at an example using the Strategy Search Summary Tool:
Suppose you wanted to invest in Target on Tuesday Morning. Of course we now know the stock jumped nearly 2% in trading yesterday on news of strong earnings. But, if you had run the strategy search summary tool this morning on Target Covered Calls, Bull Put Credit Spreads, and Bull Call Debit Spreads for the month of September, this is what the search would have returned:
| Covered Calls | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sell Option |
Option Info |
Bid | Dwsd Prot |
% If Unch |
% If Assgn |
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| TGTIK | 07 SEP 55.00 | $5.70 | 9.60% | 3.00% | 3.00% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| TGTIY | 07 SEP 57.50 | $4.00 | 6.80% | 4.40% | 4.40% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| TGTIL | 07 SEP 60.00 | $2.70 | 4.60% | 4.80% | 6.40% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| TGTIZ | 07 SEP 62.50 | $1.60 | 2.70% | 2.80% | 8.70% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Bull-Put Credit Spreads | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sell Option |
Option Info |
Bid | Buy Option |
Option Info |
Ask | % Potential Profit |
Net Credit |
Break Even |
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| TGTUX | 07 SEP 52.50 | $0.80 | TGTUJ | 07 SEP 50.00 | $0.50 | 13.60% | $0.30 | $52.20 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| TGTUK | 07 SEP 55.00 | $1.35 | TGTUJ | 07 SEP 50.00 | $0.50 | 20.50% | $0.85 | $54.15 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| TGTUK | 07 SEP 55.00 | $1.35 | TGTUX | 07 SEP 52.50 | $0.90 | 22.00% | $0.45 | $54.55 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| TGTUY | 07 SEP 57.50 | $2.10 | TGTUX | 07 SEP 52.50 | $0.90 | 31.60% | $1.20 | $56.30 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| TGTUY | 07 SEP 57.50 | $2.10 | TGTUK | 07 SEP 55.00 | $1.45 | 35.10% | $0.65 | $56.85 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Bull-Call Debit Spreads | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sell Option |
Option Info |
Bid | Buy Option |
Option Info |
Ask | % Potential Profit |
Net Credit |
Break Even |
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| TGTIK | 07 SEP 55.00 | $5.70 | TGTIJ | 07 SEP 50.00 | $10.00 | 16.30% | ($4.30) | $54.30 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| TGTIK | 07 SEP 55.00 | $5.70 | TGTIX | 07 SEP 52.50 | $7.90 | 13.60% | ($2.20) | $54.70 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| TGTIY | 07 SEP 57.50 | $4.00 | TGTIX | 07 SEP 52.50 | $7.90 | 28.20% | ($3.90) | $56.40 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| TGTIY | 07 SEP 57.50 | $4.00 | TGTIK | 07 SEP 55.00 | $5.90 | 31.60% | ($1.90) | $56.90 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| TGTIL | 07 SEP 60.00 | $2.70 | TGTIK | 07 SEP 55.00 | $5.90 | 56.20% | ($3.20) | $58.20 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
All of these trades above, including the Bull Call Debit Spread with a 56% return are still looking good. The only thing is on Wednesday night, the same trade is only potentially returning 39%. Please visit the PowerOptions website or call one of the helpful trading experts at 877-992-7971 for more information on the powerful suite of options search tools PowerOptions has to offer.
Competitors:
Competitors for TGT include: Costco Wholesale Corp. (COST), Wal-Mart Stores Inc. (WMT), Kmart Corporation (private), Bed Bath & Beyond Inc. (BBBY), Big Lots Inc. (BIG), Charming Shoppes Inc. (CHRS), Gymboree Corp. (GYMB), Penney (J.C.) Co. Inc. (JCP), Kohls Corp. (KSS), PetsMart Inc. (PETM), Sears Holdings Corp. (SHLD), Stage Stores Inc. (SSI), and Tuesday Morning Corp. (TUES).
For more information about how to identify and research great option trades, visit the PowerOptions website. There you will find the data you need to make quick, clear, and informed decisions. You can trade knowing you have found the best investment. Also, PowerOptions will allow you, with a few quick clicks, to quickly and accurately compare trades. PowerOptions‘ premium customer support is second to none in the industry. They can be easily contacted when you need them at their toll-free number to answer customer questions. Call them now toll free at 877-992-7971.
PowerOptions provides a free 14-day trial of its service. So join PowerOptions today, and you too can start reaping the benefits of the covered call investment strategy. PowerOptions‘ sister company PowerOptionsApplied provides expert stock option trading recommendations. PowerOptionsApplied specializes in covered calls, naked puts and iron condor stock options strategy recommendations.
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