A Weekly Option Strategy – 106% or 367%?

From conservative to aggressive, GM offers options traders plenty of opportunity.

   

A Weekly Option Strategy – 106% or 367%?

I recently wrote about a LEAP/covered call strategy on a stock that scares many peopleApple (NASDAQ:AAPL) – which I said had the potential to return 100% or more a year. The key word being potential, and the second key word Apple.

For those of you looking for an aggressive play with a more stable stock, let’s look at General Motors (NYSE:GM). You are not going to believe the numbers for both the aggressive and the more modest trade.

General Motors is on a roll – pardon the pun – and the stock recently sold off a bit due to the near depression in Europe and the toll it is taking (another pun, cannot help myself) on GM sales. The stock is undervalued as Americans are snapping up cars and trucks. If you agree, here is a wonderful trade. Follow each step and you will be pleasantly surprised when you get to the end, but the caveat is you have to be willing to risk some capital and you have to believe in GM.

Aggressive Trade (This Takes Weekly Attentiveness)

Step 1: Buy the GM January 2014 $30 LEAP. This should cost you around $2.30, or $230 a contract.

Step 2: Sell to open (write) the GM Feb. 8 expiration (week two) $28.50 call. You should get a credit to your account of around 18 cents, or $18 per contract. Be prepared to roll the calls forward if the stock rises above $28.50; you do not want to be called out. These are first day of the week (Monday, Feb. 4) type prices and at this point are illustrative.

Step 3: Do some math. If you are not called out, your return is 7.8% in less than a week. Do it 50 times a year. You can do that math as well: 391%. No kidding. Even if you sell a call that’s further out of the money – say, the GM Feb. 8 expiration $29 call for a nickel – the weekly return is 2.1% and the annualized return is 109%.

A More Conservative Trade (This Takes Weekly Attentiveness)

Step 1: Buy the GM January 2014 $30 LEAP. This should cost you around $2.30, or $230 a contract.

Step 2: Sell to open (write) the GM March 15 expiration (monthly) $30 call. You should get around 35 cents, or $35 per contract. Be prepared to roll the calls forward if the stock rises above $30; you do not want to be called out. These are prices for options roughly seven weeks away from expiration.

Step 3: Do some math. If you are not called out, your return is 15.2% in seven weeks or so. Do it 11 times a year and your return is 106%.

However, there are two risks.

1. You are called out: This would mean the stock has risen above $30 on the aggressive trade. You lose $1.50 per share if you do not roll the calls forward. This should not happen if you are attentive, as GM rarely moves in sudden bursts and options are very liquid. You can always buy back to cover the $28.50 weekly call and sell to open (write) another call that expires at a later date. This not a risk if you do the more conservative trade and buy the $30 LEAP.

2. GM stock falls and your LEAP expires worthless.  You would lose $2.30 per share. Of course, if you kept selling to open (writing) covered calls, averaging 18 cents per contract per week, you net $9 a share. Not exactly a loss at a gain of $8.65 per share.

This takes some work but I find it’s well be worth it. And you have to visit the GM pickup truck assembly plant in Flint, Michigan – it is bigger than my alma mater’s campus at Georgetown.

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