Buying Stocks at a Discount

Samples of Option Strategies and Trade Ideas

The purpose of this blog is to provide samples of long-term trade ideas that have been written about at Phil's Stock World, or in the weekly newsletter, Stock World Weekly. For the newsletter, click here for a free trial.  For some examples of how the strategy works, go here. ~ Ilene 

TEO and BMRN

Ideas in the Week Ahead section from Stock World Weekly, Greece Meets Kafka, Feb. 12, 2012

We have a couple of bullish trade ideas this week (although we are not as out-and-out bullish as Barron’s Jeremy Siegel). Scott of Sabrient submitted, “Telecom Argentina SA (TEO, $19.94) provides telecommunication services in Argentina. Mobile phones have provided solid growth for TEO. TEO announces earnings on Feb 17, 2012, and the estimates easily support the dividend of $2.21 per share which is a 10.8% yield paid once per year (April). Latin America is likely going to experience stronger growth than most of the world, driven by rising disposable incomes. I believe the stock is attractively priced to buy/hold through the dividend and then like selling covered calls to enhance the yield.”

Pharmboy follows up with some thoughts on what to do with the profits realized from his virtual trade ideas in the opening section. He wrote, “With some of these gains, I think it is wise to start looking for sound companies that will weather the potential rocky waters that could come. BMRN ($37.21) is a solid company. Its principal products include Naglazyme, a recombinant form of N-acetylgalactosamine 4-sulfatase enzyme used to treat a genetic disease mucopolysaccharidosis (MPS)VI; Kuvan tablet, a proprietary synthetic oral form of 6R-BH4 indicated for patients with Phenylketonuria (PKU), a metabolic disease; Aldurazyme for the treatment of mucopolysaccharidosis I, a genetic disease; and Firdapse for the treatment of lambert eaton myasthenic syndrome, an autoimmune disease. 

“I think of the company as a teenage Genzyme and would like to establish a small position in BMRN by buying 100 shares for $37.21 and selling a July $35 call and put for $6.80 or better combined. The spreads are large in the options, so patience will be needed.”

For some recent examples of how to buy stocks for a discount, click here. 

The Relentless Pursuit of Meaningless Metrics (Excerpt)

Excerpt from Stock World Weekly, "The Relentless Pursuit of Meaningless Metrics."  (Feb. 5, 2012)

We have a trade idea from Scott at Sabrient. Scott submitted “AGCO Corporation (AGCO, $52.84) has the makings of a stock ripe for long exposure. AGCO is the third largest farm equipment maker in the world and has reported better-than-expected earnings results in the last four quarters. Analysts are expecting the company to report $1.33 on February 7, 2012, and it is trading at a forward P/E of 10. AGCO is the #9 ranked stock in the Sabrient Baker’s Dozen 2012. These have collectively gained over 15% in the first month of trading.” (For downside protection, a call can be written (sold) on 100 shares of the stock .)

Our resident biotech trader, Pharmboy, submitted two trade ideas: 1) “Infinity Pharmaceuticals (INFI, $6.95) was punished last week for a failure in a clinical trial for a very difficult cancer to treat. Its drug is similar to that of Curis (CRIS), and I want to take advantage of the volatility and sell a put to see if we can get into a play. Sell the April $7.5 put for $1.40 or better. 

2) Trius Therapeutics (TSRX, $5.57). The company is in clinical trials with an antibacterial compound and it just registered to sell 8.6M shares. I like scaling back into a position, so buying 200 shares in here, looking to get the position up to 500 over time, if it does not move back up quickly. There are no options on TSRX.”

For some recent examples of how to buy stocks for a discount, click here. 

Disclaimer
Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results. We make no representations that the techniques used in our rankings or selections will result in or guarantee profits in trading. Further, our analyses are based on third-party data, which we cannot guarantee as to adequacy, accuracy, completeness or timeliness. We accept no responsibility for any loss arising for use of these materials.
Hypothetical or simulated performance results have certain limitations unlike an actual performance report. Simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under or over compensated for the impact, if any, of certain market factors such as lack of liquidity. Simulated trading programs in general are also subject to the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown.

Phil and Pharmboy's Buy-Write Ideas for Jan. 23

Excerpt from Stock World Weekly: QE-Cating

Phil's Trade Idea: BA

In other news, the Airbus super jumbo A380 jetliner is experiencing problems with hairline cracks that have been discovered in a number of “non-critical” brackets inside the wings of several aircrafts. Phil wrote in Member’s Chat, “That's good for Boeing (BA, $75.52), once people stop worrying that they screwed up the 787 as well. This is silly because the 787 is not in the least bit similar to the A380, which BA said was a gigantic mistake from day one. Should Airbus end up scrapping or even delaying production – even if it survives it financially (and it will because it is "too big to fail" in Europe) - China can't possibly fill the gap, and BA is in a position to give some very onerous terms to lock in orders, hire Airbus engineers, and ramp up production of 787s. Two 787s are needed for each cancelled A380.”  This could allow BA to “blow out its numbers for the next decade.”

“I am loving selling the BA Jan $65 put for $5 and buying the Jan $65/75 bull call spread for $6.15, for net $1.15 on the $10 spread. That spread is 100% in the money to start. 

"All BA has to do is hold $75 for the year and it's a 769% gain on cash. TOS says net margin on the short puts is $6.50 so the full $8.85 gain would be 136% back on margin too – a very nice little trade that can make your year BUT – Keep in mind we're not really bullish yet, so waiting for a dip and looking at this next week is the real plan as long as BA doesn't look like it's getting away on the Airbus news.” BA finished last week at $75.52.

Pharmboy's Biotech Ideas

We finish this week’s newsletter with some trade ideas from our resident biotech investor. Pharmboy submitted, “EXEL ($5.00) - a pick from PSW a while back when it was at $7, and again at $4 where we doubled down. Positive data came in today, and the company has some momentum going forward. I like a simple buy-write - buying 100 shares for $5, and selling the August 2012 call and put for $1.80 combined.

Other ideas are:

“Selling SGEN ($17.61) June $17.50 call and put for $4.70 combined, buying 100 shares here.

“Selling PLX ($5.91) May $7.5/5 call and put for $1.55, and buying 100 shares.” [This means selling the May $7.5 call and selling the May $5.00 put.]

Pharmboy's Biotech Ideas

Pharmboy submitted two trade ideas to Stock World Weekly this week (Jan. 15):

The first is a buy-write on AMRN. Pharmboy wrote, “I like Amarin (AMRN, $7.17) - once a high flier (down 60% from its high) - for its Lovazza (purified fish oil) and good outcome in trials for lowering triglycerides in patients. I think starting a small, speculative position in the company is worthwhile. But I would not go gung-ho. There are still risks involved. I like buying 100 shares of stock and selling one June 2012 $8 call and selling one June 2012 $6 put for $2.60 or better combined.” AMRN was trading at $7.17 on Friday, and the June $8 call was at $1.75, and the $6 put was at $1.10.

Regarding his second idea, Pharmboy wrote, “Another favorite drug of mine that was just hit with a warning label is Seattle Genetic's (SGEN) Adcetris. Adcetris is approved by the FDA for use in Hodgkin’s lymphoma (HL) and systemic anaplastic large cell lymphoma (sALCL), for after other chemotherapeutic agents fail. Treating cancer is a hard and tricky business, and further, 'knocking down' the immune system using chemotherapeutic and immunosuppressant agents can lead to PML. Tsybri did for BIIB...and now SGEN found out that its drug does as well. I am not too concerned and like the Company's potential and pipeline. I like selling two (2) June $17.50 puts for $2.40 or better.” SGEN was at $17.65, and the June $17.50 put was at $2.35 on Friday. If SGEN drops below $17.50 and is put to the put seller, it would be equivalent to buying the stock for $15.15. 

For the newsletter, click here for a free trial.  

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Philstockworld, LLC (PSW) nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither PSW nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance, including the tracking of virtual trades and portfolios for educational purposes, is not necessarily indicative of future results. Neither Phil, Optrader, Oxen Group, Pharmboy, or anyone related to PSW is a registered financial adviser and they may hold positions in the stocks mentioned, which may change at any time without notice. Do not buy or sell based on anything that is written here, the risk of loss in trading is great. 

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only intended at the moment of their issue as conditions quickly change. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice. 

SABRIENT'S BAKER'S DOZEN

SABRIENT'S BAKER'S DOZEN

(From Stock World Weekly, January 8, 2011.  Read the Week Ahead section here.)

If you missed Sabrient's Baker's Dozen webcast, we have Sabrient's stock picks for next year here. Steven Russolillo at the Wall Street Journal covered the Baker's Dozen in “Stock Picks From a Group That Has Beaten the Market for Three Years Running.” He wrote, “Classic Wall Street strategies like the ‘Dogs of the Dow’ or ‘sell in May and go away’ have been around for years and have produced mixed results. A relatively new approach with a strong track record is hoping to gain some traction.

"Market research firm Sabrient Systems last night unveiled its ‘Baker’s Dozen’ list of top stock picks for 2012. The firm combines a fundamental and quantitative approach that combs through thousands of stocks before selecting what it believes will be 13 top picks of the year...”

Chuck Jaffe at MarketWatch also reported on the Baker's Dozen in “13 stocks for 2012.” Reviewing the results over the last three years, Chuck noted, “In 2011, Sabrient’s list averaged a gain of 7.3% — hurt by a loss of 73% in Trina Solar TSL — with its best stock up 105%.” (Trina may be an example of why considering a stop loss with this strategy may be reasonable.) In 2010, the Baker’s Dozen stocks gained an average of 21%, and in 2009, they gained an average of 36%. 

Sabrient's top stocks are selected because they score high on Sabrient's “growth at a reasonable price” (GARP) scale. Phil's buy-write strategy is well-suited for these stocks, as these companies have solid fundamentals but are selling at reasonable prices according to Sabrient's formula.

Sabrient's Baker's Dozen list for 2012:

Seagate Technology (STX) - Currently $18.30

Western Refining (WNR) - Currently $14.83

Ocwen Financial Corp. (OCN) - Currently $14.47

Watson Pharmaceuticals (WPI) - Currently $63.21

United Therapeutics (UTHR) - Currently $48.52

Cloud Peak Energy (CLD) - Currently $19.86

Globe Specialty Metals (GSM) - Currently $12.71

Dana Holding (DAN) - Currently $13.16

AGCO Corp. (AGCO) - Currently $47.64

DXP Enterprises (DXPE) - Currently $33.95

Kronos Worldwide (KRO) - Currently $21.70

United Rentals (URI) - Currently $29.63

Ameristar Casinos (ASCA) - Currently $17.35

Stock World Weekly editor Ilene asked Scott Brown at Sabrient to give us some buy-write ideas, designed so that one could enter some of these picks with a 10-20% discount. Scott sent in several ideas. Using the buy-write strategy, one would buy 100 shares of stock and sell 1 call and 1 put to complete the position. 

WNR: Sell the Mar $15 call at $1.40 and sell the Mar $15 put at $1.65.

STX: Sell the Mar $18 call at $1.50 and sell the Mar $18 put at $1.35.

GSM: Sell the Mar $12.50 call at $1.20 and sell the Mar $12.50 put at $0.95.

DAN: Sell the Mar $13 call at $1.20 and sell the Mar $13 put $1.00. 

 

 

BUY/WRITE STRATEGY (Updated Jan. 1, 2012)

BUY/WRITE STRATEGY Featuring Pharmboy

Updated Jan. 1, 2012.  Happy New Year!

We have three timely buy/write ideas from Pharmboy to illustrate how the "buy/write" works. Key is that for 100 shares of stock, Pharmboy sells 1 call and 1 put against the 100 share position. This is a bullish position, but hedged by

(1) the sold call. The price of the sold call increases if the stock rises, but decreases if the stock falls. Thus, being short the call limits a gain on the stock while offsetting a loss in the stock, and

(2) selling the premium in both the SOLD call and put. If the stock price rises, the value of the sold call goes up but the value of the sold put goes down (making it cheaper to buy the put back, but more expensive to buy the call back). Because the call and put are SOLD, not bought, as the time on the options run out, the premium runs down as well.

These trade ideas were posted in this week's Stock World Weekly, "Sound and Fury". This is an excerpt. To learn more about this strategy, and for more examples, keep reading below.

Excerpt:

We are also reiterating a few trade ideas Pharmboy mentioned in our recent review of his ideas in Stock World Weekly, December 18, No Virginia, There is No Santa Claus Rally. In that issue, Pharmboy wrote, “Regarding Protalix BioTherapeutics, (PLX, $5.23), I am hopeful that PLX will get approval for taliglucerase alfa in May or June of 2012. In our virtual portfolio, we have 200 shares of PLX (average cost of $5.26). I’d add a buy-write to the PLX shares. The trade idea in a “buy/write” is to SELL one call and SELL one put per each 100 shares of stock owned. For 200 shares of PLX, I like selling two May 2012 $7.50 calls and selling two May 2012 $7.50 puts for $3.70 or better combined. This strategy gives us a chance to let PLX rise over time and buy back the put before the FDA date. I like the same idea for a new position in PLX.” 

PLX opened on Dec. 19 at $5.19 and closed Dec. 30 at $4.93. The May 2012 $7.50 calls are trading at $0.55 and the May 2012 $7.50 puts are trading at $3.10 - these can still be sold for $3.65 combined. Shares of PLX are now cheaper. 

Pharmboy also discussed several other trade ideas for his virtual portfolio. He still likes the two outlined below. (The third, a long trade idea based on CRIS, is out his initial range. CRIS is 13% higher - it opened Dec. 19 at $4.13 and closed Dec. 30 at $4.68.)

Pharmboy: “PDLI ($6.01) – I like selling one May 2012 $6 call and put for $0.95 or better for 100 shares of PDLI.” PDLI opened at $6.01 on Dec. 19 and closed at $6.20 on Dec. 30. The May 2012 $6 call is trading at $0.50 and the May 2012 put is trading at $0.40 - these can still be sold for a combined $0.90. 

“MITI ($6.88) - I like selling one May 2012 $7.5 call and put for $1.90 or better for 100 shares of MITI.” MITI opened at $6.92 on Dec. 19 and closed at $7.19 on Dec. 30. The May 2012 $7.50 call is trading at $0.70 and the May 2012 $7.5 put is trading at $1.10 - these can still be sold for a combined $1.80.

NEW (an afterthought):  I also like buying 100 shares of VRTX ($33.21) combined with selling a Jan. 2013 $35 call and selling a Jan. 2013 $30 put for $12 or so. 

******

Updated Jan. 1, 2012.  Happy New Year!

We have three timely buy/write ideas from Pharmboy to illustrate how the "buy/write" works. Key is that for 100 shares of stock, Pharmboy sells 1 call and 1 put against the 100 share position. This is a bullish position, but hedged by

(1) the sold call. The price of the sold call increases if the stock rises, but decreases if the stock falls. Thus, being short the call limits a gain on the stock while offsetting a loss in the stock, and

(2) selling the premium in both the SOLD call and put. If the stock price rises, the value of the sold call goes up but the value of the sold put goes down (making it cheaper to buy the put back, but more expensive to buy the call back). Because the call and put are SOLD, not bought, as the time on the options run out, the premium runs down as well.

These trade ideas were posted in this week's Stock World Weekly, "Sound and Fury". This is an excerpt. To learn more about this strategy, and for more examples, keep reading below.

Excerpt:

We are also reiterating a few trade ideas Pharmboy mentioned in our recent review of his ideas in Stock World Weekly, December 18, No Virginia, There is No Santa Claus Rally. In that issue, Pharmboy wrote, “Regarding Protalix BioTherapeutics, (PLX, $5.23), I am hopeful that PLX will get approval for taliglucerase alfa in May or June of 2012. In our virtual portfolio, we have 200 shares of PLX (average cost of $5.26). I’d add a buy-write to the PLX shares. The trade idea in a “buy/write” is to SELL one call and SELL one put per each 100 shares of stock owned. For 200 shares of PLX, I like selling two May 2012 $7.50 calls and selling two May 2012 $7.50 puts for $3.70 or better combined. This strategy gives us a chance to let PLX rise over time and buy back the put before the FDA date. I like the same idea for a new position in PLX.” 

PLX opened on Dec. 19 at $5.19 and closed Dec. 30 at $4.93. The May 2012 $7.50 calls are trading at $0.55 and the May 2012 $7.50 puts are trading at $3.10 - these can still be sold for $3.65 combined. Shares of PLX are now cheaper. 

Pharmboy also discussed several other trade ideas for his virtual portfolio. He still likes the two outlined below. (The third, a long trade idea based on CRIS, is out his initial range. CRIS is 13% higher - it opened Dec. 19 at $4.13 and closed Dec. 30 at $4.68.)

Pharmboy: “PDLI ($6.01) – I like selling one May 2012 $6 call and put for $0.95 or better for 100 shares of PDLI.” PDLI opened at $6.01 on Dec. 19 and closed at $6.20 on Dec. 30. The May 2012 $6 call is trading at $0.50 and the May 2012 put is trading at $0.40 - these can still be sold for a combined $0.90. 

“MITI ($6.88) - I like selling one May 2012 $7.5 call and put for $1.90 or better for 100 shares of MITI.” MITI opened at $6.92 on Dec. 19 and closed at $7.19 on Dec. 30. The May 2012 $7.50 call is trading at $0.70 and the May 2012 $7.5 put is trading at $1.10 - these can still be sold for a combined $1.80.

NEW (an afterthought):  I also like buying 100 shares of VRTX ($33.21) combined with selling a Jan. 2013 $35 call and selling a Jan. 2013 $30 put for $12 or so. 

 

How To Buy Stocks For A 10% Or Higher Discount

How To Buy Stocks For A 10-20% Discount

Courtesy of Phil's Stock World

If this market hasn’t convinced you that buy and hold is a gamble, I don’t know what will. Holding any stock for more than a day can be a recipe for heartache (sometimes in just an hour), but we have been having a good time during our member sessions, bottom fishing, and concentrating on plays that give us much better prices than the ones paid by the average retail investor. 

Phil’s Buy/Write Strategy is a method commonly used at Phil's Stock World for establishing bullish positions in value stocks. It is a variation of one of the most effective, time-tested tools for investing in volatile markets, and it allows us to purchase shares in a company for less than the current price. As long as you are willing to own 200 shares of a stock, this system can reliably give you a 10-20% discount off the current market price. 

A buy/write options strategy gives you a simple method to invest in equities at better prices than those paid by the average investor.  

By writing (selling) options against the stock, we collect option premiums - that's where the discount comes from. 

This is a long term strategy.  Currently, there are many stocks trading at multi-year lows, and it’s important to select ones that have strong underlying fundamentals.  Another sound investing principle is to scale in, because our timing is rarely perfect and the market is quite volatile. Selling options simultaneously with buying a stock is one way to automatically scale in - to enter a position in stages. 

Selling puts and calls against a stock is a way to automatically follow the scaling system.

The key is to pick stocks that are:

1. Trading near lows/undervalued
2. Fairly volatile
3. NOT likely to go bankrupt
4. Either pay dividends or have good growth
5. Have a clear path of continuing contracts to write
6. You don’t mind owning the shares long-term

The great thing is – there's always an option.

We have featured over 100 of these "Buy-Write" plays in member chat. They offer a good way to capitalize on volatility while hedging risk. If the market flatlines or declines, we are positioned in stocks at good prices that can generate a reasonable monthly income – which will keep us flexible in a challenging market!

****

Example Buy-Write Trades

United Therapeutics Corporation (UTHR) ~ Anatomy of a Buy-Write (Oct. 17, 2011)

Below is a new trade idea from Pharmboy to illustrate the Buy/Write Strategy. 

For a stock that has strong underlying fundamentals at a good price, Pharmboy decided on UTHR for this example.

Phil’s Buy/Write Strategy in Action (October 17, 2011):

Trade Idea: Buy 100 shares of UTHR ($39.20) and Sell 1 May 2012 $40 Call and Sell 1 May 2012 $35 Put for approximately $7.80 combined.  

• Buy 100 UTHR at ~ $39.20
• Sell 1 May 2012 $40 Call at ~ $4.80
• Sell 1 May 2012 $35 Put at ~ $3.00

Thus, approximately $7.80 is collected in premium against the $39.20 price for the stock. This reduces the net cost to $31.40. 

Three possible scenarios:

1. If UTHR trades above $40 at expiration in May, 2012, then we give up the shares purchased for $40, keeping the $7.80 premium (from selling the options) and an appreciation of $0.20 on the stock.  That's a gain of $8 on an initial outlay of $31.40. The result is ~ 25% profit, and we end up out of the position completely.

2. If  UTHR trades below $35, we are obligated (due to the put we sold) to buy another 100 shares of stock at $35. Our average price will be ($31.40 + $35)/2, or $33.20. Our cost for 200 shares would be 15% less than if we simply bought 200 shares of stock at $39.20 now.  

If 200 shares is our full position, we can later write 2 calls against the position, and collect more option premium.  If our ultimate position size is larger, we can also write a put against the position–opening the possibility of owning another 100 shares in the future.

3. If UTHR is trading between $35 and $40 at expiration in May, 2012, both the call and the put will expire worthless, and we will be left with 100 shares of UTHR for a cost of $31.40.  Again, we could write another call and/or put against the position. 

This is a common strategy of hedge fund managers, but anyone can do it.  It is one of the best ways to capitalize on volatility while hedging risk on long positions. 

*****

The latest Buy-Write idea in Stock World Weekly (Oct. 16, 2011), came from our resident biotech expert, Pharmboy. 

TEVA ~ new trade idea (Oct. 16, 2011)

Pharmboy wrote, “Amidst a market run-up of epic proportions, I like selling premium. I also like buying good companies, with stable revenues, and a sizable dividend. TEVA ($39.17) is a generic drug maker that just acquired Cephalon for its drug pipeline. The stock is cheap, and revenues should be stable over the coming year.

I like buying 100 shares here, and selling the Jan. 2013 $40 call and Jan. 2013 $35 put for $9 or better.

*****

AstraZeneca (AZN) ~ previous trade idea (Sept. 18, 2011)

Note: price of AZN at the close of Sept. 16, 2011 was $44.91. On the 19th, it traded lower, between $43.62 and $44.39. On Oct. 17, 2011, it was trading at $46.64.

Excerpt from Stock World Weekly (Sept. 18, 2011 Issue):

We have a trade idea this week from Pharmboy, who wrote, “I am looking at companies that have safety for income portfolios at reasonable prices. AstraZeneca (AZN, $44.91) has a 5.3% dividend yield, a solid pipeline, steady revenues, and a forward P/E of about 7. I like buying the stock here, and, for those interested in lowering their cost via selling options premium, I like selling the January 2013 $40 calls and puts for $11.50 combined. That results in a buy/write price of ~$33.40/$36.70. It's simple and shouldn't need managing for some time.  

 (Editors’ note: If 100 shares of AZN are bought for $44.90 and 1 put and 1 call are both sold for $11.50 combined, that reduces the cost to $33.40. If AZN is trading above $40 at expiration, the stock will be called away and the put will expire worthless. The gain will be $6.60 on an investment of $33.40, or 20%. If the stock is below $40, it will be “put” to the person who sold the Jan. 2013 $40 put, for $40, so the new cost, an average of the first 100 shares at $33.40 and the second 100 shares at $40, will be ($33.40 + $40)/2 or $36.70.)

******

New Buy/Write Trade Ideas from Pharmboy on November 6, 2011.

Stock World Weekly, It's Greek to Me!

Pharmboy's Trade Ideas

This week’s trade ideas come from Pharmboy, who submitted the following essay. The remainder of this section is courtesy of Pharmboy.

At PSW, we focus on just about everything from virtual day trades to virtual income portfolios. As Barry Ritholtz noted, the average stock is being held no longer than seven months (in 2007). For longer term, dividend-yielding stocks, a few companies stand out. For investors looking for a mix of solid companies with more speculative biotechs, here are some ideas. Most are buy/write examples - buying 100 shares and selling 1 call and 1 put to reduce the net cost of the shares. (For more details on recent buy/write examples, click here.)

Merck (MRK, $34.02) - we initiated a virtual buy/write on MRK by selling the Jan. 2013 $40 call and $35 put for $8 (sold). We bought the stock for $37.30. Currently MRK is trading lower, but the calls and puts more than offset the lower stock price. I like initiating a virtual new spread by buying 100 shares, and selling 1 Jan. 2013 $35 call and 1 Jan. 2013 $30 put for $5.20 or better (combined).

Bristol-Myers Squibb (BMY, $31.34) - we initiated a buy/write on BMY buying 100 shares and by selling the Jan. 2013 $25 call and $27.5 put for $7.70 (sold). Currently, BMY is trading at $31. For a new virtual position, I would buy the stock and sell the Jan. 2013 $30 call and $27.5 put for $5.80 or better.  

(Ed. note: Pharmboy switched from selling a higher strike BMY Jan. 2013 put in the first buy/write example to selling a higher strike call in the second example. The reason is that he thought the stock would rise when he provided the first virtual trade idea. Now, he is less confident that BMY will trade higher, although he thinks BMY should stay above $25, even if stocks trade lower.)

Pfizer (PFE, $19.66) - Not one of my favorite big pharmas. Lipitor comes off patent...but IF it maintains its dividend, I’d be VERY conservative with a buy-write. I like buying 100 shares, and selling 1 Jan. 2013 $15 call and 1 Jan. 2013 $17.5 put for $6.65 or better.

British Petroleum (BP, $43.85) - things are looking up for this oil giant, and it pays a nice dividend. I like buying 100 shares and selling 1 Jan. 2013 $40 call and put for $13.30 or better.

Sunoco (SUN, $37.65) - I like selling a Jan. $25 2013 put for $2.50 or better (trading at $2.44 now). This is to initiate a future buy of SUN. (This is not a buy-write - it's a simple Selling of a Put, which may lead to buying a position at a discount from the current price.)

Intel (INTC, $23.74) - this tech giant continues to shine. I like buying 100 shares and selling 1 Jan. 2013 $22.50 call and put for $6.05 or better.

For more trade ideas from Pharmboy, sign up for a free trial to Stock World Weekly and read the rest of the newsletter here >

*****

For a 20% discount for all PSW newsletter services, click here.

Phil's Stock World features many trades like these on a daily basis, while Stock World Weekly features highlights in our weekly newsletter… Try Stock World Weekly out FREE.

Disclaimer

Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results. We make no representations that the techniques used in our rankings or selections will result in or guarantee profits in trading. Further, our analyses are based on third-party data, which we cannot guarantee as to adequacy, accuracy, completeness or timeliness. We accept no responsibility for any loss arising for use of these materials.

Hypothetical or simulated performance results have certain limitations unlike an actual performance report. Simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under or over compensated for the impact, if any, of certain market factors such as lack of liquidity. Simulated trading programs in general are also subject to the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown.