Option Writing Recommendations

By Malcolm Berko

January 15, 2014 5 min read

Dear Mr. Berko: Your recent column on options was interesting. And I own all four of the recommended stocks in that column. I have been selling call options for several years on stocks in my retirement portfolio, which has increased my cash flow 1 to 4 percent annually over and above my gains and dividends. I know I could do better, but this takes a lot of time, which I don't have because my law practice consumes between 50 and 60 hours a week. And I can't do the necessary research for the same reason. Therefore, this email to you requests the names of some good stocks to sell options on that would have good potential for long-term gain in my portfolio. — TS, Indianapolis

Dear TS: I also know enough about the option market to modestly improve my cash flow. But I could probably more than triple my very modest results if I were more knowledgeable. Strange as it seems, I have neither the energy nor the time to become more knowledgeable. To be successful, I need to develop a skill set that requires years to master. It's like the difference between performing brain surgery as a newly minted med school graduate and doing so as an experienced neurosurgeon. Though I understand the option concept, I don't follow this market closely enough to recommend suitable buy-write opportunities, and because I lack a professional's skills, I'm not comfortable personally selecting specific issues for you.

This world is the province of the 10 dozen or so true option giants in the U.S. These are kooky guys who eat and live in a world of stochastic calculus, Riemann sums and Brownian motion. Most of them have behavioral affectations (tics, twitches, blinks) and unusual speech patterns and perceive the environment differently than we do. These super-geeks have egos as big as the Bronx and don't talk to commoners like me. Most of these guys are Fields Medal material — an award in mathematics eminently more prestigious than the Nobel Prize. But I do know a commoner (he has a familial relationship to some in this crowd) to whom some of these super-geeks will talk. He is straight as an arrow, speaks clearly and is enthusiastically contagious about using options to enhance portfolio returns, and his results are not unimpressive. So I called and asked for recommendations on stocks on which you can sell rich option premiums.

Apple Inc. (AAPL-$540) designs, makes and sells iPhones and the like. SolarCity (SCTY-$65) sells, leases and installs energy systems to homes and businesses. InvenSense (INVN-$20) designs and sells microelectromechanical systems for motion tracking devices. Universal Display (OLED-$34) engages in research, development and commercialization of organic light-emitting diode technologies. InterDigital (IDCC-$29) designs and develops technologies that enable and enhance wireless communications. 3D Systems (DDD-$95) develops, makes and sells 3-D printers. McDonald's (MCD-$96) has 35,000 fast-food restaurants in 119 countries.

Those seven issues offer attractive 12-month premiums ranging between 10 and 14 percent, and some provide good dividend payments, which will enhance your cash flow on a 12-month buy-write. However, the returns can be mind-bendingly higher if you have the knowledge to put on strips, straps, straddles and strangles. This concept involves the simultaneous purchase and sale of various option contracts on the same stock, sometimes at different prices and sometimes at different times. These annual returns can be dramatically higher (along with a significant increase in volatility and risk) if these transactions are effected in a margin account.

The seven issues above are good candidates for the very simple buy-write strategy. In this scenario, a conservative investor can increase the cash flow on his long-term investment portfolio by an additional 3 to 8 percent in a good market and 2 to 4 percent in a poor market. If you are a trader, the numbers can be much higher in a good market, but the losses can be terribly humbling in a down market. And if you get involved in strips, straps, straddles and strangles (which is where the Fields candidates shine), the gains and losses can be explosive or implosive. But don't do this without expert advice.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected] To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

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