Here are two different strategies you might like to try out. The first is pretty simple and straight forward. The second is a bit more complex.
For the past however many years I have used Caps as a way of following different companies. That was good enough to get me near the top using only some basic screens of mine. Recently I put up my actual portfolio, less the micro-caps that Caps won’t allow, and about 15% cash, on the board.
Most of the companies I am involved in I trade options. I like two types of transactions in particular. I like to sell puts and I like to create synthetic longs.
Selling a put is pretty straight forward. I receive a premium for agreeing to buy the stock in a company I like at a later date for a particular price if it is below the agreed upon strike price. The strike price I pick is usually about the current price, although I will adjust upward if I am particularly bullish or downward if I want a little more safety I the short run.
For example, I have been selling January 8 puts on EXAS every time the stock dips towards 7. Love the premium and since there is a pretty good floor around 6, when premiums are included, if I had to buy, it would be just above the floor.
The synthetic long I use is a little weird by most people’s standards I think. I like to sell a long dated put near the money on something, say EXAS, CRME or GMO, and buy a short dated call near the money. It’s a calendar deal. I’m not even sure there is an official name. The reason I do it is because I get a great premium due to time value and can use some of that money to take a shot at a multiple gain on a call.
The trick is getting a few of these calls to pay off each year. That’s hard. You have to know a stock well, it’s earnings cycles and in these cases their potential near term catalysts. To note, GMO is near the end of getting key approvals to start digging molybdenum, EXAS is near some validation results and CRME is likely to get bought by Merck someday and has products closing in on market penetration.
In the worst case scenario I get to own stocks I like down the road for a discount to today’s price. I still need to know my companies, but this is a great way to cut some risk, both off of the calendar and with the premium offering me a discount if I do have to buy.
