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.