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The Perfect Trade for Today's Stock Market

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

By: Money_Morning


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 :

Money Morning/The Money Map Report

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