Use These 4 Option Trades to Prosper in 2012

Here’s a great article that explains the advantages of trading options and gives you 4 smart option plays to start the new year with. As with any recommended trades, make sure you do your own research to see if you agree with the reasoning discussed in the article.

Options are a brilliant trading tool, even for those who may not consider themselves to be “traders.” After all, where else can you use a variety of different strategies on just one type of security to keep the returns rolling in on a regular basis?

There’s nothing wrong with buying stocks. (That’s because you can collect a “double dividend” by selling calls against them and, oftentimes, collecting a scheduled dividend payout as well.) But you might see your portfolio doing well when the market’s up, and then most of your holdings collectively dropping when the market plummets. And if you’re only holding stocks, you’re missing out on a whole lot of potential profits that you wouldn’t otherwise have access to.

While our goal as traders and investors is to pick securities that remain strong no matter what else is going on in the world, inevitably you’ll have a dud (or two, or five, or 10…). And that means you need to set aside a portion of your portfolio where you’re both spending a small amount of cash to get positioned for more and scheduling regular paychecks from the market in the form of selling to collect premium.

And only options let you do that, month after month (or even week after week).

So as 2011 turns into 2012 this weekend, if your resolution (once again) is to have a prosperous new year, be sure to include “trading options” as a tool — in fact, perhaps the only tool you need — to help you reach this goal … and surpass it!

To get you started, we here at Stutland Volatility Group have four options trades — using a variety of sectors and strategies — to set you up for some great options gains during the first part of the new year. Let’s take a look at them now…

Trade 1: T Long Call

Buy the T March 28 Call for $2.10 with T trading @ $30.00

AT&T (NYSE:T) stock offers the best of both worlds for investors. Its 6.0% annual dividend yield makes it a great income trade, while the company’s fundamentals are setting the stock up for growth and capital appreciation in the coming year.

By buying the T March 28 Calls, traders can control the stock with minimal cash upfront. This call is likely to expire in-the-money (that is, with the stock trading above the $28 strike price) because the near-certainty of AT&T’s dividend in this uncertain market makes the stock very attractive.

This translates into significant demand for the stock each time it dips and its yield increases. Should this call expire in the money, investors can exercise their option to buy the stock at $28, locking in a yield of 6.3% in 2012.

Trade 2: WDC Covered Call

Buy 100 shares of WDC @ $31.25

Sell the WDC Feb 33 Call @ $1.55

You can gain exposure to Western Digital Corp. (NYSE:WDC), a mid-cap hard drive producer, by buying the stock and selling a call against it.

Western Digital has been growing its margins at a steady clip, is expected to take market share from rival Seagate (NASDAQ:STX), and is awaiting approval from Beijing for its proposed acquisition of Hitachi’s storage business.

The WDC Feb 33 Calls are trading with a nearly 50% implied volatility, which means there is a big premium to be had in selling them. This trade will make your effective basis in the stock $27.90, and it would provide a call-away yield of 15% in just 50 days.

Trade 3: CEO Long Call

Buy the CEO July 180 Call @ $17

CNOOC Ltd. (NYSE:CEO) is a Chinese company involved in the exploration, development, production and sale of crude oil and natural gas.

There are several catalysts that could boost the price of oil in China in 2012, which would give CNOOC’s bottom line a big boost.

  1. China and India are likely to continue increasing their strategic reserves of crude oil.
  2. Unrest in Kazakhstan could endanger a 5 million-barrels-per-day supply of crude oil to China.
  3. Iran, Iraq and Syria are all sources of major uncertainty and could cause Middle Eastern oil to trade with a significant risk premium in its price.
  4. Should central banks, notably the Fed and European Central Bank, continue their quantitative easing, energy prices will continue to rise.

Should some or all of these materialize in 2012, CNOOC Ltd. is likely to see significant appreciation. Buy the CEO July 180 Calls for $17 to gain exposure to this upside with only a tenth of the downside risk and margin there is to owning the stock.

Trade 4: AOL Long Put

Buy the AOL April 14 Put for $1 with AOL trading @ $15.50

Given that AOL’s (NYSE:AOL) dial-up business is now obsolete, the company’s only source of income in the near future is its online advertising business. Unfortunately, this business has been costing the company $500 million annually.

Since spinning off from Time Warner (NYSE:TWX) in 2009, AOL has been competing directly with Google (NASDAQ:GOOG) and Facebook, among others, for ad dollars. So far they have been loosing the battle, and management has yet to come up with a plan to turn their fortunes around.

The stock is poised to fall in 2012, as its current price of $15.50 is a severe overvaluation. Buying the AOL April 14 Put costs only $1 and gives traders exposure to all of AOL’s downside past $14.

See Investor Place the entire article

Option Trading Secrets

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