Michael Shulman, Expert Trader, Analyst and Educator

Michael Shulman, Expert Trader, Analyst and Educator

In a market like this, is there a call you can sell?

Yes, the next one.

Say what?

When markets sell off sharply and in an indiscriminate manner—good stocks being hit as hard, if not harder, than lousy companies and stocks—you can sell calls to “roll down” your position, lower your cost basis and generate cash at the same time.

You can also buy stocks that look like they are headed lower and sell in-the-money calls. If the stock moves lower, keep the cash and enjoy a much lower cost basis for the shares you own.

These tactics are based on the following assumptions:

  • You cannot time the market, but you can value a stock.
  • You are willing to roll a call forward if the stock moves back up.
  • You are willing to be called out and either forego owning the stock in the future or are willing to buy it back on Monday.

This approach can work on widely held stocks, as well as stocks that you love but others do not.

One stock to look at is Virgin America (NASDAQ:VA). This cheap stock is now trading below $30. You can buy the shares and sell an out-of-the money call or buy the shares and sell an in-the-money call. Either way, you generate cash and lower your cost basis in case the market goes down.

Think about it…

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