Option Writing Strategies for Extraordinary Returns

by David Funk

Book Overview

Option Writing Strategies for Extraordinary Returns detailsput and call writing techniques sophisticated investors can useto profit from market movement in any direction. It first outlinesa strategy for selling options short, using tables and chartsto illustrate each step, and then builds a three-legged model forusing popular options tools when purchasing stocks. Additionalfeatures include techniques for extending a position or writing"up"...

• Format: Hardcover
• Language: English
• ISBN: 0071448837
• ISBN13: 9780071448833
• Release Date: May 2005
• Publisher: McGraw-Hill Companies
• Length: 256 Pages
• Weight: 1.75 lbs.
• Dimensions: 1.1" x 6.3" x 9.3"

Customer Reviews

This book can boost your financial health. It boosted mine!

I have 15 years of experience with options trading. For the past 2 years I have invested in accordance with the strategies described in this book - and have benefited as much as the author did in his verified account statement published in the book. This book is not about options strategies. It is about investment strategies - very successful ones. It uses covered option writing of both puts and calls to generate a third source of income from common stock holdings. The strategies provide me with the opportunity to partially hedge my stock portfolio as a way of offsetting the extreme volatility that characterizes recent stock market trading. The third source of income - premium income from writing options - is a significant addition to the first two sources of income from common stock, dividend income and capital appreciation, both of which currently have special tax advantages. As an example, - On August 16, 2007, I bought 1,000 shares of TE at 15.01. - On the same day, I "sold to open" 10 TE Jan 2009 17.5 calls at 1.00. - On September 4, 2007, I "sold to open" 10 TE Jan 2009 15 puts at 1.25. The annual dividend from this NYSE-traded utility stock is 78 cents, or 19.5 cents per quarter. To calculate the return (not counting any price change) from the 3-legged position over the 17 months until option expiration, first add together five dividends of 19.5 cents, or 98 cents per share. Then add 1.00 from writing a call, and 1.25 from writing a put; that's a 3.23 return on a 15.01 investment - giving me 21.5% on my total investment over the 17-month period - which works out to be an annual rate of return of 15.1%. Of course, the options may be bought back, written up, or exercised before Jan. 2009, and the stock price may go up or down. In any case, the investment strategies described in this book serve me very well. The author of this book has put in place three "guidelines" that reduce risks associated with writing covered LEAPS. Guideline 1: On the upside, the investor is encouraged to write only that number of calls covered by the underlying shares of common stock (for example, 1,000 shares of stock allow the writing of ten covered call contracts). On the stock market downside, guidelines 2 and 3 are employed Guideline 2: Puts written should be 100% cash-collateralized so that funds are present to purchase any shares actually assigned. Guideline 3: A mental loss limit of 2% of a portfolio's value is recommended. A "portfolio" should have at least ten different holdings at any time. The portfolio's value is the sum of the values of the three legs for each of the ten or more investment positions. For example, if a portfolio value is $50,000, then any position (consisting of long stock, short puts, and short calls) that is down more than $1,000 should be closed and replaced with another position When any of my net positions are down more than the loss limit, I close the position and move sideways into a comparable stock. In this way,

Writing Options for a Third Source of Income

I am an investor with 10 years of experience with writing options. I am very pleased with the conservative approach presented in this book. Of course there are other capital appreciation strategies and other income-generating strategies, but this book's strategy of the three-legged position (buy the stock, write the cash-collateralized put, and write the covered call) provides an excellent balance between risk and reward. The author stresses the importance of fully collateralizing the put, with either cash or near-cash investments such as tax-qualified preferred stock. Naked puts are never recommended. Writing covered calls and cash-collateralized puts are the key to safer long-term investing. The relevant comparison for me is how the three-legged strategy with fully collateralized puts and 100% covered calls (all LEAPS) compares with the standard investment strategy of either buying to hold a stock, or attempting to "time the market" by buying, selling, or selling short a given stock. I am convinced, through my experience with the three-legged strategy, that it is the best approach. The fact that an extremely large number of options expire worthless (about 85% of them) provides fertile field for the investment strategy of writing options for a third source of income. I can reap the rewards from the option expiration when it occurs, or, prior to expiration, I can re-write the option at a different strike price or different expiration date, or simply buy it back. I strongly recommend this book for long-term investors seeking additional investment tools with an acceptable risk level.

One of the "Year's Top Investment Books"

I got interested in this book after seeing it listed as one of the "YEAR'S TOP INVESTMENT BOOKS" in the STOCK TRADER'S ALMANAC 2006. The description said that "conservative investors who are delighted to make 10% to 15% annually, year after year, should buy this book." I am a conservative investor with an objective in that range. Not only does the book give me step-by-step directions for achieving my goal, by writing puts and calls for the stocks I purchase, but also it provides the actual, verified results obtained by the book's author. That convinced me. I am now taking advantage of the three sources of income - capital gains, dividends, and option premium income - while feeling comfortable that I will benefit from my investments no matter what the stock market does. That's a good feeling for a conservative investor.

Informative, well-documented, author shows actual investment results

This is a great book for stock market investors to follow. The strategies are sound and well-explained. I'm impressed with the success of the three-legged position. Prior to writing the book, the author opened an online discount brokerage account and set up a portfolio based on the Income Model described in the book. Included in the book are his verified brokerage firm statements for the first year. His one-year results are impressive - a gain of 15.1% in a 12-month period when the S & P 100 gained 8.0%. I'd be happy to have an annual 15.1% gain on my stock market investments! From reading the book, I now understand the importance of writing puts as well as covered calls. Covered calls are useful when a stock price falls - and if exercised, offer a way to sell stock above the current market price. The short puts are useful when a stock price rises - and if exercised, offer a way to buy the stock below the market price. I like being able to benefit from stock price movements in either direction. I would love to have someone follow up with a monthly service that tells investors which stocks to use for establishing three-legged positions and which existing positions to write-up or close. Lacking that, I'll make my own investment decisions and hope to do as well as the author has done. The book certainly provides an excellent blueprint for making such decisions.

Valuable strategies, clearly presented

This book is a "must have" for the sophisticated investor interested in benefiting from writing LEAPS options for a third source of income. (As the book points out, the first source is capital appreciation, the second source is dividends, and the third source is option premiums.) I am particularly impressed with the effectiveness of the "three-legged position" (Leg 1, buy a stock; Leg 2, write a put; Leg 3, write a call) which the book clearly describes and illustrates. I have set up my own "income account" and "capital appreciation account", based on the instructions in the book, and I am delighted with the results. I plan to use the book as my guide as I re-write, write-up, and close option positions. I appreciate that the three-legged position benefits from stock price movements in either direction, because investors do not know what a stock will do when they open a position. With a three-legged position, Legs 1 and 2 move in the same direction at any time and Leg 3 moves in the opposite direction. Leg 1 always benefits from any dividends received. Legs 2 and 3 always benefit from the passage of time. If the stock declines in value, the loss on Legs 1 and 2 is reduced by the gain on Leg 3 (the short covered calls). If the stock moves up, the gains on Legs 1 and 2 are reduced by the loss on Leg 3 (except that the calls can usually be re-written, thereby increasing option income and expanding the potential gain over time). "Payoff charts" are not relevant, since option writing positions are closed well before the contract expiration date. This book is invaluable, filled with practical examples of the three-legged position and steps to take regardless of which way the stock moves.