In my 20+ years of trading and managing complex portfolios, much of which were built using derivatives, these extreme market moves do provide two silver linings. #1 is the ability to pick up quality stocks at prices that are 7-15% below where they were just 7-10 days ago. #2 is the opportunity to use out sized option premiums to create extra portfolio yield and to cushion against any further downside. And these current macro events very much tend to elevate all options prices regardless of market cap, sector or style bias.
With that in mind I used Zacks #1 and #2 ranked stocks, narrowed my search to Financial and Technology sectors, and filtered further for the highest decile readings of 2 year volatility levels. The strategy is a simple buy write structure using the regular March expiration as our time period to target. For a quick reminder, we will buy 100 shares of stock and sell one call option which equals 100 shares. March gives us a solid month for the market to stabilize some and as it does, we make money as elevated premium levels begin to deflate. As it does, even without our stocks rallying back to their highs, we collect the premium from the now rapidly decaying options. If stocks fall further, the extra 2-3% we are picking up acts as a cushioning effect against further losses.
This is not a strategy I use all of the time. Many of the expirations over the last year, option premiums were too low to sell calls in a covered write strategy. I believed selling calls in this low premium, sustained market up move was akin to giving money away. But now as we sit here today and view the market through this more "risk off" prism, selling a call is the correct move ESPECIALLY if you are establishing a new position or adding to an existing one. So here are 4 Zacks Rank #1 and #2 candidates that I really want to deploy a covered write and capture this elevated premium.
(FB - Free Report) $174: Not much of an introduction is needed for this social media juggernaut but one thing that is important is that it landed on Zacks's #1 rank list last night! The March 180 calls trading over $5 today provides a one month yield of nearly 2.9%, annualized at over 34%. That just doesn't happen with FB and is nearly twice what you'd normally receive. Selling that call, in the event the market rolls over further and takes FB with it, takes your break even in the stock to $169.
(INTC - Free Report) $43: This chip giant has held up ok during the market sell off sitting right in the middle of its 52 week range. INTC pays a nice dividend yielding 2.8% and with the MARCH 45 calls trading about $1.10, you pick up another 2.5% for an annualized yield of 30%. Again, except for maybe impending earnings or market convulsions, the call premiums existing today in INTC are very high. With a Zacks #2 ranking, pristine balance sheet and global competitive advantages, INTC is prime call write candidate.
(STI - Free Report) $66: Sun Trust Banks, a major regional Atlanta based bank, is off about 8.5% from its recent 52 week high of $72.08 but its option premiums are at a 1 and 2 year highs. With the MARCH 70 calls recently trading $1.25, an investor is grabbing onto a 1.9% 30 day yield, annualized at 22.7%. These types of trade set ups just don't happen very often. STI is a Zacks's Rank #2 stock, dividend yield of 2.43% and has banking operations throughout the most desirable regions of the southeastern United States.
(BLK - Free Report) $515: Blackrock, the world's largest asset manager and one of the dominant forces in ETF investing, is just a money making machine. It manages trillions of dollars for all types of investors, risk advises for global portfolio managers and recently launched a "private equity" like business that will look to take on Blackstone, Carlyle and even Warren Buffet. The stock pays a nice dividend yielding 2.26% and is a Zacks rank #2 stock. Today with the stock trading around $515, you could sell the MARCH 520 calls for around $16.50, giving you a yield of 3.2% for the 30 days. That's about a 32% volatility level for a stock that normally trades in the mid to high teens. That call sale equates to an annualized 38.4% return, that is a trade set up in BLK that is hard to pass up!
To recap, we are initiating these trades because these are tremendous companies, with Zacks Rank of #1 or #2 and the market tumult has given us volatility levels that have reached extremely high levels. If your investing thought process is "I would like to add some new names or build on an existing position", then these investing set ups may be exactly what you are looking for. Remember, if the stock does nothing from here, you collect the call premiums. If it moves lower, you are protected by the amount of the call sale and if we rip higher from here, your short call will be assigned but you have the stock to deliver along with a very nice profit!