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Function

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  1. Hello everyone, I was curious whether a strategy that I recently concocted would be viable, profitable, and not take unnecessary hidden risk. It goes as follows: Screen for volatile stocks with high volatility premiums in the options. Companies that have volatile stocks (but not excessive risk of permanent loss of capital) make for the best selections i.e. not healthcare stocks with binary events in the near future and not small cap stocks that may be out of business in 6 months time. Strategy: Buy the stock, sell an equivalent number of at the money calls for the shortest dated expiration. Regardless of how the stock and options do at expiry, roll the strategy forward into the next closest expiration date. The strategy works because you collect the premium on the options, month after month. The way the stock moves is pretty irrelevant because the calls are rolled forward to the nearest expiration date with the highest call premium month after month. Trade example: EBAY Price: 34.25 Option: May 11 Call Strike: 34 Premium: 1.01 (source: Yahoo! Finance) Days to expiry: 21 Annualized return = (premium collected / amount invested) * (365 / days to expiry) 1.01 / (34.25-1.01) * 365 / 21 = 52% annualized Sound like a good return for limited risk -- who cares if eBay tanks 50% you take the premium to make up for it. If it goes up 200% -- well, you missed some upside but the premiums are fantastic. And eBay is not likely going to go under in the next few years
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