Options on Down Days

With the huge stock slide today it's time to review our options basics to take advantage of these opportunities. When the market makes a big move downward like this it is prime time for selling puts for larger than normal premiums and buying back OTM calls for pennies on the dollar.

I keep a list of stocks that belong in my portfolio and use these "fire sale" days like today to try and sell puts against these securities for more money than I would have gotten otherwise. The benefits are two fold; There is a chance the stock drops more and get the stock at a huge discount or the stock rises back to normal levels and the option expires worthless and I keep the larger than normal premium.

My conservative put sale order:
VE Jan $20 for 1.05, This is one I discussed in the last post as a key long term holding that you have to own and with this sale the worst that can happen is you own the stock for $19 which is a 20% discount from todays price and would make the yield 9%!!

My risky put sale order:
RINO Dec $7.50 for .85, Owning this stock for $6.70 would be great, but be careful what you wish for with these highly volitile Chinese stocks. If you don't have a fun, high risk/high reward, speculative stock this one is worth playing.

If you sold calls 500-700 dow points ago like I did then instead of waiting for them to expire you could buy them back and book the income now. This will help you put more of your buying power to work selling more options for more premiums. If you sold a call that expires more than a month or two in the future and you can buy it back for 10% or less of the premium you paid the prudent move is to do so.

My call closing order:
ONP Nov $15 at .05, This has been a good premium provider and was discussed in a previous post. Trying to close it out after selling for .95 premium leaving me a $90 per contract profit.

Long Term Holdings

Most of my posts revolve around short term trades and option plays, but now I am going to give you my long term holdings. Long term holdings are stocks I have held or plan to hold for one year or more to capture profits from long term growth trends, dividend yield, or both. Having a long term holdings portfolio in addition to a trading portfolio and options portfolio is as key to diversification as spreading your investment in different sectors of the market. The following is a list of my favorites.


Note: A majority of my long term holdings are now becoming option plays as well through selling covered calls against the stock which is the safest way to profit from options.

Provident Energy Trust: (PVX) This is a steady income machine with an almost 10% dividend yield and has a dividend distribution monthly! Great holding for tax deferred account.

Berkshire Hathaway (BRK.B) Now that the stock has split bringing the price down to an affordable level and is option-able this is a no-brain er for a long term holding as a no fee mutual fund with the best fund manager free can buy, Warren Buffett. A quick computation shows me that The operating business is worth at least $30 a share and it's Investment portfolio at least $60 a share leaving me a value of roughly $90 a share and it is only trading at around $80 right now.

Veolia Environment (VE) This is the largest water treatment company in the world meaning it's great cash flow should continue as long as the world needs water, which is forever! It's close to it's 52 week low so we should see some appreciation in the stock while we collect that 5.5% yield.

Petro China (PTR) You know my portfolio wouldn't be complete without exposure to China. PTR has huge EPS, a good steady dividend, and a strengthening Yuan that will all help this one continue it's climb higher.

China Mobile (CHL) I round out the group with my favorite of the group and another China play. This will be the big long term mover as only about 50% of the Chinese population currently have cellular service compared with close to 90% in the U.S. so look for tens of millions of new subscribers in the next year or two. As this move happens we can collect the 3.5% dividend and sell well out of the money covered call to create income. All of this companies assets and revenue are yuan based and will appreciate in value to with the yuan.