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Protect yourself against the double dip

Today's Financial News - Posted October 2, 2009

This simple covered call strategy based on the S&P 500 gives plenty of upside potential if market strength continues, but buys you insurance in case the bears take charge once again.

by Andrew Snyder

Baltimore, MD — TFN: After several months of straight-forward action that led to the best third quarter in nearly a decade, the markets are getting nervous. As volatility rises, so does the risk of investing in the equities market. But for us options investors, rising volatility means rising valuations.

Over at TFN Strategic Trader, we just sold five plays for 351% cumulative gains. But we still have about a dozen open positions. Some are ultra-conservative. Others are nerve-wracking speculative trades. We even have a handful of low-risk, high-reward covered calls.

With the markets threatening to make a ‘double-dip’ formation that could ultimately test March lows, I am going to let you in on our most conservative pick. It’s on the house!

I assure you my generosity is purely self-serving: I need you to have some ready cash at hand should you want to join our service and get in on the plays with triple-digit potential. I can’t give those away for free: They’re far too small and volatile to unleash to a large readership!

But enough self-promotion. So how can you use options to protect yourself — just in case the markets suddenly plunge towards March’s low?

A simple covered call strategy based on the S&P 500 is all you need. It gives plenty of upside potential if the strength continues, but buys you insurance in case the bears take charge once again.

Here is part of a recommendation I recently emailed to TFN Strategic Trader subscribers:

Any time we want to play the overall market, we look towards the S&P Depository Receipts (NYSE:SPY), better known as SPDRs. This highly liquid ETF and its options are the best and most-accurate way of playing the broad market.

Any time I use a covered call strategy, my ultimate goal is gains of 15%. It creates the optimal balance between risk and reward: To hit that target this time, we will sell SPY’s March 114.00 calls (SPYCJ) and use the premium to buy the underlying ETF. At current prices, it gives us a target gain of just over 17%.

Obviously, with the March expiration date, this is a long-term play designed to give us protection from the volatility that is bound to lie ahead.

It is a simple play, but it perfectly exemplifies the power of options and the many different ways we can use the derivatives market to our advantage. With this play, we can lock in gains if the market moves up OR down. Thanks to this week’s action, this covered call strategy is a better buy than ever.

Take advantage of the power of options trading. Get in on this play and then get in on the truly monstrous money-makers lurking in our portfolio: http://www.todaysfinancialnews.com/TST/china/ETSTK702.html


Next Article: Three big movers to start the week

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Posted by Andrew Snyder · Filed Under Options 

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