Alcoa Strategy Written by Shawn Stewart

For the past couple of weeks, I have been playing around with an income trading strategy with some of my bullish picks for the year. The company I used was Alcoa (AA). Since I was bullish, and I owned the underlying shares, I decided to sell puts (bets that the stock would go down) against my shares. For every 100 shares of a stock owned, you can write/sell an options contract for it. In this case, I owed 500 shares of AA, so I wrote 5 put contracts. Here’s the run down for the transaction:

• On 2/21/2014, I sold to open 5 AA 11 Put contracts. The price per contract was $.15 (or 100 x .15= $15), and the shares were trading around $11.84. This means I received a $75 ($15 x 5 contracts) credit to my account.
•  On 3/14/2014, I did a ‘buy to close’ transaction to buy the contracts back so I could close the position. On that day, AA was trading around $11.84, and contracts were trading for $.06 that day, so my profits were the initial $.15 premium minus the closing price $.06. That’s a $.09 (or $9) profit per contract.
•  Take that $9 X 5 AA 11 put contracts, and my profit was $45

Even though the stock pretty much traded flat despite my bullish conviction, I was able to lock in a profit because the shares never dropped below $11. If I let the contracts expire worthless, I would’ve collected a total premium $75 on the trade instead of $45.

Though this strategy yields less return compared to some of the trades Britney has previously made, it was a comfortable transaction. Some traders want to make returns, and be able to sleep at night, and if that is your risk profile then, I would definitely suggest looking into this type of strategy.

Another upside to writing contracts on your shares is that there is potential on top of potential. First off, you would profit from any upside gain on the shares. Secondly, you will still collect dividends on your stocks. And lastly, you now have more income from collecting the premium!

Disclaimer: This was not a risk free investment. If Alcoa, dropped below $11 per share, I would’ve lost money. In this strategy, it is imperative to find 1) a strike price that has a bit of cushion given the time till expiration, and 2) finding the highest premium to write contracts for.

Thanks for reading.

Shawn