June 15, 2010

Today the market is up close to 1% across the board. My stocks are mainly follinwg this with TICC more towards the downside. Obama is currently making a talk about BP and the oil spill. I'll have to keep an eye on the market this afternoon to see what's happening.

I need to look more into covered calls. The issue is since I am only sell 1 or 2 contracts, commission greatly eats away my gains. This being said, 1% is better than 0%, but I cannot sell in the money calls, atleast not if I want to make money.

Most of my stocks are momentum stocks with high RS combined with a high dividend yield. One exception is CIM. CIM is a Real-Estate Investment Trust(REIT) that mainly deals with residental mortgages and real-estate. This is a fairly risky play, but being Bullish by nature, I feel that in the next 5-10 years, CIM will be a very worthwhile investment. This will require that the market recovers. CIM also has a 16% dividend yield. My broker will allow to to reinvest dividends with no commission cost, so I will be participating in this for CIM.

The reason a bring up CIM is that fact that it is NOT a momentum stock. this present an interesting opportunity that I worked the numbers on yesterday. All of the numbers I use for options will be from optionsxpress. Though I do not trade through them, their education resources are very insightful. And this brings me to protective puts.

Protective puts require the bare minimum options access granted by brokerage institutions. A protective puts is when you buy a put option on a stock you already own. The idea is that as that stock you own decreases in value, the put increases in value, hedging your investment. Protective puts are used by Funds as an insurance policy. Yesterday I did the math on a protective put on CIM.

I haven't quite learned how to input math effectively into a blog, but:

Buying a put on June 15, 2010 for the July 5 Strike:
.95 X 100 shares = $95 + commission = $104.70 up front

Now, if CIM falls to $3.80 per share(Which it did 2 weeks or so ago), then the Put will sell for:
1.20 x 100 shares = $120 - commission = $110.30

Profit:
$110.30 - 104.60 = 5.60 profit. Doesn't sound like much but:
5.60/initial investment = 5.60/104.70 = .053 * 100 = 5.3% return. Not Bad.

I was not brave enough to pull the trigger on this strategy, but it shows you how to make money using protective puts. The more I learn about options, the more I like them.