streetflame (99.81)

The Options Market & Basic Strategy

September 20, 2009 – Comments (3) | RELATED TICKERS: NS , QXM , WNR

Hi all,
I have been learning about options the past few weeks and had a few questions and comments.

Here are the most helpful links I have found.
There are many places to look up options chains, for example: http://www.optionseducation.org/quotes/default.jsp
Options Oracle is a great free software program.  Anyone interested in options should definitely download it.  Whether you are just interested in one particular option or in sorting through thousands, the return graphs, volatility smile graphs, screening wizard, etc. are extremely useful: http://www.samoasky.com/

1. Buying Puts: I began by looking at puts because I am becoming more bearish.  My portfolio has beaten the market by quite a bit in the past year, but it has been held back a bit by short positions I have taken. (Nowhere near as much in real life as on CAPS however.) So I wanted to capture downside profit while limiting upside risk.  However, in general I could not find many puts which seemed priced well.  There are a few decent priced ones like LIFE, AMT, and CHH but those are not even stocks I really want to short.  To me shorting is a better deal than buying puts.  You can always limit your risk with a stop-loss.

2. Buying Calls: In general calls do not seem cheap to me either.  However one did jump out at me as being extremely underpriced.  Those are NuStar Energy (NS) $50-$55 Dec-Mar calls.  Does anyone have an opinion on these?  I don't like NS quite enough to buy the stock, but these calls seem like an incredible deal (selling below calculated Black-Scholes value, extremely low implied volatility compared to other NS calls and other companies in industry).

3. Writing Puts: In my opinion this is the best segment of the options market right now.  Implied volatility is extremely high throughout the market, which makes writing options more profitable compared to buying them.  Some in the money puts that look like good deals are: QXM, WNR, VISN, SPAR, ESEA, CSR, SBLK, AAWW, AFAM, GTLS, GLF, TSO, FEED and many more.  Any opinions on these? Of course if I sold puts on QXM, WNR, SPAR or ESEA, I would need to sell the shares I hold, so my total exposure to them would not get too big. 

4. Writing Covered Calls: Right now I just sell if I don't love the upside of a current holding anymore. In the future I will check out covered calls in that situation.

It seems like one of the most common long-short hedge strategies is to be highly long stocks and buy puts.  However in the current market I would rather be not very long stocks and sell covered calls and puts.   Of course the problem is not paying a lot of margin interest, trading fees or taxes and not taking on too much risk.  Therefore I want to take my time before jumping into options. Any suggestions or good links regarding options strategy would be highly appreciated.