Very Low Risk Option Selling.

Our fund is basically a short term options play on the market. Doing options on 30 day cycles increases risk and makes research and watching stock movement intra day imperative to success and profits.  Short term options increase percentage profits significantly and one can increase the number of sold positions in your portfolio thereby maximizing profits for the portfolio.  However one should not take risks like these unless you are an experienced trader willing to spend the research time and constant work that makes outcomes profitable.  Even professionals lose money and make errors in judgement, but professionals know that the goal is to have more gains than losses. Most regular investors have trouble with taking even one loss.    

There are plays available for home gamers as Cramer calls them that are frankly as close to slam dunk options as one can get.  First of these are call options. Call options are simply selling a position in your stock to someone else who pays you a premium. You already own the stock so have accepted the gain or loss in the stock, call options offer additional profits to the owner of the stock.  Using a call option to exit a stock is like having someone else pay your sales commission. The beauty of call options is that you can sell them over and over with little risk to your position other than increasing profits. 

The other plays that are very low risk are far forward in the money put positions in blue chip megacap stocks. For instance let's take McDonalds Corp., symbol MCD,  which is currently selling for $100 and change. The stock has been on an up trend for many years, is one of the best managed companies on the planet, and is continually eating it's customers lunches so to speak. The chances of this stock falling to $80 per share over the next twelve months is virtually zero.  A $80 put for January 2013 expiration currently sells for $2.31 per share. So for every 100 shares you are willing to sell a put on your make $231 of option premium.  That is about a 3.0% return on our money, while you still get to keep your money in the account to back up the option purchase.  If you are earning 1% or so on your funds you have a almost 4% income with almost no risk. Better yet you get the $231 the first day of the option sell to use all year.  The best time to do these put trades is when the market has taken a significant loss and prices are less expensive for great companies. 

The put option approach is what Warren Buffett does with his huge cash and security hoard daily. Imagine what kind of cash flow he can generate from his assets and he gets to use these option premiums all year for other purposes to make even more money. There are numerous stocks likeMCD that offer similar opportunities for slam dunk option income.  XOM, T, JNJ, MSFT, SO, and PM just to name a few. So if you are looking to trade like Warren Buffett with much less risk then maybe long term in the money put options might be your ticket to profits. 

Full disclosure we use long term hedging put options such as noted above in a personal account not related to the STI Hedge Fund.