Oct 1, 2010


October is a month that frightens many investors.  Now that we have seen the best September in the past 70 years, what's in store for October?

The one thing that I know for certain is that I have no clue what lies ahead.  Most investors, and that includes investment clubs, are always bullish.  I don't know if that's because they are believers or are unaware of alternatives.

I'd never suggest that your club take short positions, but if this recent rally has anyone concerned about the future, investment clubs are positioned to take advantage of using options to hedge (reduce the risk of owning) stock positions.

If you own at least 100 shares of any stock, consider writing a covered call.  This does limit upside profits, but you receive a cash premium that's yours to keep, no matter how the stock price behaves.

It's not a lot of protection against a steep stock decline, but it does soften the blow.  In addition, you earn a profit when the stock price remains essentially unchanged - and that beats the stockholder who would earn nothing.  And if the stock does move higher - and is above the strike price at expiration, you earn a nice profit.  Perhaps you could have done better, but taking this is an excellent method for eliminating specific stocks from the portfolio.

If your portfolio contains stocks that are being considered as sales, think about writing an at-the-money covered call instead of making the outright sale.  This will be a losing decision only when the market undergoes a large decline.

Mark D Wolfinger