NOTE: This post was written by Scott Nations, President and Chief Investment Officer at NationsShares and a contributor to CNBC's "Options Action."
Yesterday's move was really impressive, and if is open-ended then there's no rush to sell stocks or buy protection. How do you get long with stocks at highs? You can't just buy protection every time a stock makes a new high – you give away all your gains. You can't just buy call spreads to get long, the math is set against you and the same thing happens. I wouldn't get long via a risk reversal because I don't want to be short puts here. (Read More:Stocks Extend Fed Rally; Apple at All-Time High)
A great strategy we've discussed and that I like here, against long stock, is selling 2 out-of-the-money calls to buy 1 at-the-money call. Even though the math isn’t really in your favor, this is a great trade. It levers additional upside until you’re called away – at a level at which you should probably be selling anyway – but doesn't lever the downside.
This sort of trade lines up really well in Visa, which made a 52-week high yesterday (along with every other stock - just check out the Dow Jones Industrial Average) and it would generate a little cash. Against long stock at 134.98, I could buy a December 135-strike call at 6.00 and pay for it by selling 2 of the December 140-strike calls at 3.75 each for a total of 7.50. Net premium pocketed is 1.50 and we keep that no matter what happens. We'd get our stock called away if it's above 140 at December expiration, but we'd also pocket the $5 from being long the 135/140 call spread. The effective price if we're called away is 146.50, or 11.52 (8.5%) above yesterday's close.
This strategy is could be particularly effective because it doesn’t cost a lot, and offers a lot of bang for your buck. (Read More: Beyond Kraft, Is There a Dow Curse? )
Scott Nations is the President and Chief Investment Officer at NationsShares and a contributor to CNBC's "Options Action."
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