An Options Strategy for Believers
The following is an excerpt from James Altucher's Internet Review newsletter, originally sent to subscribers on March 27 at 9:52 a.m. EST. For more information on this newsletter and for a free trial, click here.
This week I'd like to revisit a strategy I consider very effective when investing in value stocks (I consider most of the stocks in the Internet Review portfolio value stocks in a growth industry -- the best of both worlds).
We're in many of the stocks in the Internet Review for the long haul. But wouldn't it be nice to generate some income on them in the meantime? We can do that by selling put options on select positions.
If the stock price falls below the options' strike price, you get "put" more shares (meaning you're obligated to purchase them), but at attractively low prices. That's not a bad proposition, because we like these stocks, right?And if the underlying shares rise, we still get a "paycheck" from selling the options! This strategy is related to portfolio construction. When I initially enter a position, I only make it 1% to 2% of overall holdings, because I'm not a believer in the focused portfolio idea of having, let's say, only 10 picks. I prefer 30 to 50 picks because, as already demonstrated by our current portfolio, one can significantly outperform the market. I do leave room to increase the size of individual positions, usually to around 3% of total holdings, and I accomplish this through the put sales. The nice thing about these sales is that even if the puts expire worthless and I don't increase my stock positions, I still get a nice options premium and reduce my cost basis. Below I discuss the stocks I highlighted in my Feb. 27 newsletter as being candidates for put sales, describing what actually happened. I then discuss where I would now sell puts for April expiration. Copart (CPRT): I suggested the March $25 puts, which were trading at 15 cents. The stock closed at $26.86 last Friday; the $25 puts would have expired worthless. You would have made $15 on each contract you sold (one contract is for puts on 100 shares). Right now the stock is at $27.49, and it doesn't look like there are any interesting (i.e., cheap) contracts to sell.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV