Stock and Options Hedging Portfolio
Mick Flaherty has been trading stocks, options, and futures for over 30 years and has worked as an Economist and as a Broker/Trader for some of the largest firms on Wall Street. Mick began working on Wall Street in 1977 right after graduate school at the State University of New York at Stonybrook where he earned a Masters in Economics.
His initiation into trading began with futures at the outset of the tremendous run on metals, specifically silver futures. He was mentored by a legendary trader from Conti Commodities, a subsidiary of Continental Grain. From there, he worked as an Economist for Merrill Lynch Futures and as a Broker/Trader for Shearson and E.F. Hutton where he learned the intricacies of options and derivative trading. He has run the gamut from stocks to pork bellies.
The TAS Stock and Options Trade Program will be traded soley by Mick Flaherty. Maximum stop limits are always in force. The Program uses both Technical and Fundamental Analysis. The core decision making processes are all a focus of sector strength and best of breed analysis combined with active stock options trading and hedging. We believe this method has the potential to be profitable in a variety of market conditions, including rising, falling, and sideways markets. The Program seeks to trade opportunities identified across the Russell, Dow, S&Ps, NASDAQ, and Bonds. The Program seeks to both minimize costs for the investor while maximizing potential returns. Trades will be in 100 share stock increments and 1 option contract. Not all trades will be immediately covered with an option contract at the discretion of Mick Flaherty
Options Strategies: Covered Call
The covered call is a strategy in which an investor writes a call option contract while at the same time owning an equivalent number of shares of the underlying stock. If this stock is purchased simultaneously with writing the call contract, the strategy is commonly referred to as a "buy-write." If the shares are already held from a previous purchase, it is commonly referred to an "overwrite." In either case, the stock is generally held in the same brokerage account from which the investor writes the call, and fully collateralizes, or "covers," the obligation conveyed by writing a call option contract. This strategy is the most basic and most widely used strategy combining the flexibility of listed options with stock ownership.
Market Opinion?
Neutral to Bullish on the Underlying Stock
When to Use?
Though the covered call can be utilized in any market condition, it is most often employed when the investor, while bullish on the underlying stock, feels that its market value will experience little range over the lifetime of the call contract. The investor desires to either generate additional income (over dividends) from shares of the underlying stock, and/or provide a limited amount of protection against a decline in underlying stock value.
Benefit
While this strategy can offer limited protection from a decline in price of the underlying stock and limited profit participation with an increase in stock price, it generates income because the investor keeps the premium received from writing the call. At the same time, the investor can appreciate all benefits of underlying stock ownership, such as dividends and voting rights, unless he is assigned an exercise notice on the written call and is obligated to sell his shares. The covered call is widely regarded as a conservative strategy because it decreases the risk of stock ownership.
Introduction
When considering any options strategy, you may want to think about Long-Term Equity AnticiPation Securities® (LEAPS®) if you are prepared to carry the position for a longer term. While using LEAPS® does not ensure success, having a longer amount of time for your position to work is an attractive feature for many investors. In addition, there are several other factors that make LEAPS® useful in many situations.
Stock Alternative
LEAPS® offer investors an alternative to stock ownership. LEAPS® calls enable investors to benefit from stock price rises while placing less capital at risk than is required to purchase stock. Should a stock price rise to a level above the exercise price of the LEAPS®, the buyer may exercise the option and purchase shares at a price below the current market price. The same investor may sell the LEAPS® calls in the open market for a profit.
Diversification
Investors also use LEAPS® calls to diversify their portfolios. Historically, the stock market has provided investors significant and positive returns over the long term. Few investors purchase shares in each company they follow. A buyer of a LEAPS® call has the right to purchase shares of stock at a specified date and price up to three years in the future. Thus, an investor who makes decisions for the long term can benefit from buying LEAPS® calls.
Hedge
LEAPS® puts provide investors with a means to hedge current stock holdings. Investors should consider purchasing LEAPS® puts if they are concerned with potential price drops on stock that they own. A purchase of a LEAPS® put gives the buyer the right to sell the underlying stock at the strike price up to the option's expiration.
What's the Downside?
If you are a buyer of LEAPS® calls or LEAPS® puts, the risk is limited to the price you paid for the position. If you are an uncovered seller of LEAPS® calls, there is unlimited risk, or a seller of LEAPS® puts, significant risk. Risk varies depending upon the strategy followed, and it is important for an investor to understand fully the risk of each strategy.
According to the terms of a put contract, a put writer is obligated to purchase an equivalent number of underlying shares at the put's strike price if assigned an exercise notice on the written contract. Many investors write puts because they are willing to be assigned and acquire shares of the underlying stock in exchange for the premium received from the put's sale. For this discussion, a put writer's position will be considered as "cash-secured" if he has on deposit with his brokerage firm a cash amount (or equivalent) sufficient to cover such a purchase.
Market Opinion?
Neutral to Slightly Bullish
When to Use?
There are two key motivations for employing this strategy: either as an attempt to purchase underlying shares below current market price, or to collect and keep premium from the sale of puts which expire out-of-the-money and with no value. An investor should write a cash secured put only when he would be comfortable owning underlying shares, because assignment is always possible at any time before the put expires. In addition, he should be satisfied that the net cost for the shares will be at a satisfactory entry point if he is assigned an exercise. The number of put contracts written should correspond to the number of shares the investor is comfortable and financially capable of purchasing. While assignment may not be the objective at times, it should not be a financial burden. This strategy can become speculative when more puts are written than the equivalent number of shares desired to own.
An investor who purchases a put option while holding shares of the underlying stock from a previous purchase is employing a "protective put."
Market Opinion?
Bullish on the Underlying Stock
When to Use?
The investor employing the protective put strategy owns shares of underlying stock from a previous purchase, and generally has unrealized profits accrued from an increase in value of those shares. He might have concerns about unknown, downside market risks in the near term and wants some protection for the gains in share value. Purchasing puts while holding shares of underlying stock is a directional strategy, but a bullish one.
