Recent trends are shaping the options market in exciting ways. The bond market selloff has driven a surge in call options activity for the iShares 20+ Year Treasury Bond ETF (TLT) as traders bet on a rebound in bond prices despite rising Treasury yields. The low put-call ratio for TLT reflects bullish sentiment, suggesting optimism for a recovery. Those of us who utilize options should keep an eye on interest rate movements and bond market dynamics since these could heavily impact strategies and opportunities (obviously).

Meanwhile, inflation rose slightly, which may prompt the Federal Reserve to keep interest rates steady. Even without a rate cut (generally considered bullish), this stability may support equity markets.

Also, Options trading hit record volumes in 2024, thanks to retail participation and innovations like zero-day-to-expiration (0DTE) options. Looking ahead, the potential introduction of 0DTE options for individual stocks and changes in market liquidity could create new opportunities and risks.

One of my favorite strategies to utilize when I believe a stock is fairly valued (or really close) is the “Covered Strangle.” This is when you purchase the underlying security or a Leap Option and simultaneously sell an OTM Call Option and an OTM Put Option (same expiration). It’s essentially the combination of a cash-secured put and a covered call.

For example, you would buy 100 shares of XYM at $100/share, sell a call option with a strike price of $105, and sell a put option with a strike price of $95. The idea is that if the share price decreases below $95, you will be assigned to purchase the stock at a slight discount to what you determine to be a ‘fair valuation.’ If the stock increases beyond $105, you will be assigned to sell your shares for a slight gain of what they were purchased for. If the price remains between the $95 and $105 range, you keep the premium from the sold options, along with any dividends the stock paid during the period.

There are many ways to customize this strategy and tailor it to your specific outlook. It would be helpful to open your platform’s options chain and/or use an options calculator to play around with the strike prices, expirations, etc.

Things to note with this strategy: The stock could tank to $0 (or very near it), and you could lose your entire underlying. In this scenario, you could also be assigned to purchase the stock at the Put’s strike price (if you weren’t paying attention and didn’t catch it on it’s way down). The stock could soar to $200+/share, and you could have been assigned to sell at $105, missing out on ridiculous gains. You will also want to consider the tax implications, as selling within a year of purchase could land you in your ordinary income (higher) tax rate, as opposed to your usually lower capital gains rate.

Myth: Options are only for professional traders and are too risky for regular investors.

Bust: Yes, options involve risk. The entire market bases its returns on the risk level of the particular investment vehicle. But, they are not exclusively for professional traders. With proper education and a clear strategy, options can be a versatile tool for any investor, particularly when it comes to strategically collecting premiums.

The flexibility of options allows investors to adjust to various market conditions. The key is understanding how they work and using them prudently, rather than diving in without preparation. This newsletter is for educational purposes only, not financial advice, thus, you will want to consult a financial professional to ensure your investments suit your circumstances. That said, leveraging educational resources, practicing in a virtual trading environment, and then starting small are excellent ways to begin exploring options.