Options Strategy for 2012

 Current volatile stock market has been gut wrenching but also created opportunities with tremendous upside potential. I have spent my Thanksgiving weekend, trying to come up with trades to more than make up for my shortfall in 2011.

 My goal was to come up with trades in which rate of return far exceeds the risk, use a combination of covered call options and spreads, but keep my cost very close to the current stock price.

 This strategy will give me $2 gain for every dollar increase in stock up to my target price, for little or no extra cost. Downside is same as holding the stock which is loosing value and breakeven is same as cost of transaction.

 I was looking for stocks that are battered with the market and has no specific problem with the company; my short options and targets are close to or below average analyst targets. My search came up with the following trades with potential:

Six trades for 60% return:

Ford: Ford is my favorite pick in the auto sector and a stock I can hold long term. Stock has seen a high of $18.97 this year and has been trading at $9.75 and has an average price target of $16.69. I think $15 is very achievable target for F. For every 100 stocks owned, buy one Jan13 $10 call option and sell two Jan13 $15 call options. Total cost is $10.60 and if stock is $15 or more by January 2013, profit is $9.65.

Freeport-McMoran: FCX is my favorite pick in metals and mining stocks. FCX has been trading at $33.82 and has an average price target of $51.72. Stock has seen a high of $61 this year and my target of $45 is very conservative. For every 100 stocks owned, buy one Jan13 $34 call option and sell two $45 call options. Total cost is around $34 and if stock is at $45 or more by January 2013, profit is $22, also get to keep $1 in dividend.

ICICI Bank: IBN has been trading at $27.56 and has an average price target of $54. Stock has seen a high of $53.84 this year and it might be safe to set a price target of $40. For every 100 stocks owned, buy one Jan13 $30 call option and sell two Jan13 $40 call options. Total cost is under $30 and if stock is at $40 or more by January 2013, profit is around $20, and also gets to keep $.62 in dividend. I hate to invest in financial sector right now, but can’t avoid this bargain priced stock in a country growing at 7% year over year. Currency fluctuation might be a cause for concern for this stock.

Valero Energy: VLO has been trading around $20.23 and has an average price target of $30.93. Stock has seen a high of $31 this year and should see that level with any improvement in the economy. For every 100 stocks owned, buy one Jan13 $20 call option and sell two Jan13 $30 call options. Total cost is around $21.70 and if stock is at $30 or more by January 2013, profit $18.30. Also get to keep $.60 in dividend.

Vertex Pharmaceuticals: VRTX has been trading at $26.60 and has an average price target of $53. Stock has seen a high of $58 this year and has reasonable success with its new hepatitis c drug, Invicek. Earnings projections for this biotech stock are north of $3 for 2012 and have a pipeline that can boost the stock price. I feel it’s at bargain price after the recent sell off and can easily reach my $40 target.

  For every 100 stocks owned buy one Jan13 $28 call option and sell two Jan13 $40 call options. Total cost is around $27.80 and if stock is at $40 or more by January 2013, profit $24.20.

Yandex: YNDX has been trading at $19.75 and has average price target of $34. Stock has seen a high of $42 this year has been very volatile. For every 100 stocks owned buy one May12 $20 call option and sell two May12 $28 call options. Total cost is around $21.60 and if stock is trading at $28 or more by May 2012, profit around $16.60. No portfolio is complete without a tech stock and I love search engines.

Disclaimer: This article does not constitute investment advice. It is for entertainment purpose only.

Source: Yahoo finance

Disclosure: I have positions in F, FCX, IBN and YNDX. I might initiate  positions in VLO and VRTX in the next 72 hours.