Using Options to Bide Your Time

The disadvantages are that the position suffers as the spread moves either deeper into the money or further out of the money, and a decline in implied volatility will also negatively impact the position.

Zomaya believes the recent selloff in drug and biotech stocks is presenting an attractive opportunity and suggests establishing a calendar spread in the Biotech HOLDRs(BBH Quote) using call options that are one or two strikes out of the money. For example, with the Biotech HOLDRs currently trading at $135, one could sell the September $145 call and buy the January $145 call for a net debit of $4, or $400 per spread.

Of course, if you really think the market, a sector or even a specific stock will be going nowhere or has limited upside in the near term, you should sell premium or focus on positions that can be established for a net credit.

Tuesday's news from carmakers Ford(F Quote) and General Motors(GM Quote) that they took massive incentives to reduce bloated inventories, and the outlook for diminishing demand in the face of raising interest rates, will likely prevent those stocks from working much higher in the near term. It should also keep a lid on the auto-parts suppliers such as American Axle(AXL Quote), Lear(LEA Quote) and Dana(DCN Quote). All of these are candidates for establishing bearish positions.

All of these stocks have already slid substantially over the past few weeks since their second-quarter earnings reports -- even though all posted strong second-quarter earnings, they provided a downbeat outlook for the second half of the year -- and may not have much more on the downside. So although I'm not certain about how much further they can decline, I feel comfortable they will be unable to mount a sustainable rally.

For this reason I would suggest selling a vertical call spread for a credit rather than buying a put spread for a debit. By selling the call spread (selling a closer-to-the-money strike and buying a further-out-of the-money call), the position can profit through time decay even if the stock price remains stagnant.