Best of the Week
Most Popular
1. Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - P_Radomski_CFA
2.Fed Balance Sheet QE4EVER - Stock Market Trend Forecast Analysis - Nadeem_Walayat
3.UK House Prices, Immigration, and Population Growth Mega Trend Forecast - Part1 - Nadeem_Walayat
4.Gold and Silver Precious Metals Pot Pourri - Rambus_Chartology
5.The Exponential Stocks Bull Market - Nadeem_Walayat
6.Yield Curve Inversion and the Stock Market 2019 - Nadeem_Walayat
7.America's 30 Blocks of Holes - James_Quinn
8.US Presidential Cycle and Stock Market Trend 2019 - Nadeem_Walayat
9.Dear Stocks Bull Market: Happy 10 Year Anniversary! - Troy_Bombardia
10.Britain's Demographic Time Bomb Has Gone Off! - Nadeem_Walayat
Last 7 days
Stock Market Pause Should Extend - 21st April 19
Why Gold Has Been the Second Best Asset Class for the Last 20 Years - 21st April 19
Could Taxing the Rich Solve Income Inequality? - 21st April 19
Stock Market Euphoria Stunts Gold - 20th April 19
Is Political Partisanship Killing America? - 20th April 19
Trump - They Were All Lying - 20th April 19
The Global Economy Looks Disturbingly Like Japan Before Its “Lost Decade” - 19th April 19
Growing Bird of Paradise Strelitzia Plants, Pruning and Flower Guide Over 4 Years - 19th April 19
S&P 500’s Downward Reversal or Just Profit-Taking Action? - 18th April 19
US Stock Markets Setting Up For Increased Volatility - 18th April 19
Intel Corporation (INTC) Bullish Structure Favors More Upside - 18th April 19
Low New Zealand Inflation Rate Increases Chance of a Rate Cut - 18th April 19
Online Grocery Shopping Will Go Mainstream as Soon as This Year - 17th April 19
America Dancing On The Crumbling Precipice - 17th April 19
Watch The Financial Sector For The Next Stock Market Topping Pattern - 17th April 19
How Central Bank Gold Buying is Undermining the US Dollar - 17th April 19
Income-Generating Business - 17th April 19
INSOMNIA 64 Birmingham NEC Car Parking Info - 17th April 19
Trump May Regret His Fed Takeover Attempt - 16th April 19
Downside Risk in Gold & Gold Stocks - 16th April 19
Stock Market Melt-Up or Roll Over?…A Look At Two Scenarios - 16th April 19
Is the Stock Market Making a Head and Shoulders Topping Pattern? - 16th April 19
Will Powell’s Dovish Turn Support Gold? - 15th April 19
If History Is Any Indication, Stocks Should Rally Until the Fall of 2020 - 15th April 19
Stocks Get Closer to Last Year’s Record High - 15th April 19
Oil Price May Be Setup For A Move Back to $50 - 15th April 19
Stock Market Ready For A Pause! - 15th April 19
Shopping for Bargain Souvenirs in Fethiye Tuesday Market - Turkey Holidays 2019 - 15th April 19
From US-Sino Talks to New Trade Wars, Weakening Global Economic Prospects - 14th April 19
Stock Market Indexes Race For The New All-Time High - 14th April 19
Why Gold Price Will “Just Explode… in the Blink of an Eye” - 14th April 19

Market Oracle FREE Newsletter

Top 10 AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

The Perfect Trade for Today's Stock Market

Stock-Markets / Options & Warrants Sep 04, 2013 - 12:42 PM GMT

By: Money_Morning

Stock-Markets

Robert Hsu writes: This is a great way to make some extra money right now.

Over the next 14 days, I expect stocks to remain mired in a relatively tight trading range, as nobody wants to place any really big bets on what's going to happen before the Federal Reserve makes its Sept. 18th announcement on if and/or how it will "taper" its QE bond-buying program.


And you can make money from this range-bound activity with one simple trade.

It takes about 10 minutes to place. It'll last just 10 days. And it'll give you the perfect blend of low risk and high probability.

So here's what to do...

The Best Way to Boost Your Total Return

Based on my latest technical research, I'm expecting the S&P 500 to trade between 1,625 and 1,700 over the next three weeks. The S&P closed just slightly above 1,638 on Thursday, Aug. 29, and that means we are currently near the bottom of that range. It also means this market is statistically oversold.

Yet despite the market's oversold status, I am not expecting a big move higher, given the uncertainty in front of the FOMC meeting. This kind of range-bound market isn't good for investors looking to buy stocks, nor is it good for those looking to short the market.

It is, however, perfect for those who sell covered calls.

Selling covered calls is one of the best ways to generate income and to supersize your portfolio's total return. The strategy is both low risk and high probability, especially in a flat market environment that's currently at the low end of a trading range.

Here's how it works for the current trade...

The "Fast Money" Timing Is Perfect

When you sell covered calls, you collect a time premium, which decays rapidly in the final weeks before option expiration.

Recently, premiums have been elevated on the heavily traded S&P 500 Index options. The added volatility of the August decline, along with the recent risk premium due to uncertainty from the hostilities in Syria, have kicked up the value of call options.

Selling call options now, given these elevated premiums, means you are even more likely to come out on top once the volatility settles and once the index settles in at the trading range I'm expecting over the next two weeks ahead of the FOMC announcement.

Here's how I see a winning covered call trade setup for the next several weeks:

  • First, you buy the S&P 500 Index via the SPDR S&P 500 ETF (SPY) somewhere below $165 (the closing price on Aug. 29 was $164.17).
  • Second, you sell the SPY 2013 Sept. 165 calls expiring on Sept. 13 for above $1.30. Here you would sell 1 call option for every 100 shares of SPY you buy.

If SPY is above $165 on the close of Sept. 13, the stock will be called away and sold at $165. That means you collect your $1.30 premium plus whatever capital gain you get based on your buy price.

If SPY is below $165 on the close of Sept. 13, the option will expire worthless and you can just keep the premium you collected and then either hold on to SPY shares or sell them, depending on your market outlook.

For example...

If this trade had been placed at the close of business on Aug. 29 (at this writing), you would have purchased SPY at $164.22. The premium you received for the SPY Sept. 165 calls would have been $1.50.

In this scenario, as long as SPY closes above $162.72 on Sept. 13th, you would make a profit minus transaction cost.

The maximum profit would look like this:

Max. profit = $1.50 (the options premium you collected) + $0.78 (the $165 strike price minus the buy price of $164.22).

That's $2.28 per share in fast money.

The next two weeks are, I suspect, going to see stocks meandering in a tight trading range up until the Fed lets us know what, exactly, its plans are for tapering of QE.

Yet by using this covered call strategy, you don't have to sit around waiting on the outcome. Take the initiative, be proactive, and start supersizing your own total return.

Source :http://moneymorning.com/2013/09/04/this-is-the-perfect-trade-for-a-14-day-market/

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules