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The Buy-Write

My favorite type of trade is called "the buy-write". It consists of buying shares of a stock in blocks of 100 and then simultaneously selling slightly out of the money calls and puts. This is good way to boost your returns because it allows you to immediately collect cash and defer the gains until later, profit from small movements in the stock, collect dividends over the life of the trade, and potentially lower your basis and obtain the stock at a lower price in the future.

I came upon this by reading Beating Buffett. The author, Dr. Paul Price, specializes in buy-writes and has had amazing results. I urge anyone interested to check out his website as well.

The key to the buy-write is to find out-of-favor, undervalued, high-quality stocks that you believe will rise above a certain level over the next 12-18 months, but at the same time would not mind owning at a lower price in the future. These are not quick day trades. These are conservative trades that help boosts returns on your portfolio. They can even be done in your IRA.

Why sell LEAPS (long dated options)? The main reason is because they have the most time premium left in them. The main drivers of an options price are time left to expiration and volatility. This strategy is basically selling time and volatility and hoping for a small movement in the price of the stock. Time=money in the options market. And since most options expire worthless, its better to be a net-seller of options rather than a net-buyer.