IN APRIL of 1999, The Matrix was in theaters, Columbine was in the headlines and the Dow Jones Industrial Average traded near 10500. Now fast forward to present day, where the movies and news have all changed, but the Dow is still hovering near 10500. Of course, there’s been plenty of movement this way and that in the meantime, but if you’ve been a long-term investor in the Dow stocks, your money has been dead for over three years. Sometimes stocks go up, sometimes they go down. But often they go nowhere at all.
A technique called “systematic writing” is one way to make money in trendless times. It’s a neutral to bullish strategy that requires no upfront investment, has limited downside and can be highly profitable in times when there’s no clear direction to the market. It’s also a great way to dip your toe into options trading and begin integrating income-oriented strategies into your tool kit of technique.
First, a quick review of some basic options terminology: A stock option is the right to either buy or sell 100 shares of a stock at a predetermined price (the “strike price”) within a specific period of time in the future, any time before what’s known as the “expiration date.” A “call” option represents the right to buy, while a “put” represents the right to sell. Buying an “XYZ Sept. 50 call” gives you the right to buy 100 shares of XYZ at a price of $50 a share anytime before the end of the third Friday in September. Buying the put would allow you to sell 100 shares of XYZ at $50 a share anytime before that date.
Many sophisticated stock jocks are familiar with buying both puts and calls. Systematic writing, however, doesn’t involve buying options, but selling them. In the options world, “writing” means “selling” — and it all starts with a put. (more…)