This Income-Boosting Strategy Is Dangerous Right Now: VMware, Inc. (VMW), Apple Inc. (AAPL)

Another worrisome thing about put-writing is the fact that because the S&P Volatility Index , which some call the fear index, has been extremely low lately, put-writing often produces less income than it does during more normal markets. Put writers actually want fear levels in the market to be higher because that fear boosts the amount that put buyers are willing to pay for the option.

Most important, with the stock market approaching record highs, many stocks are trading well above what value investors would prefer to pay. Writing put options doesn’t work as well when you choose a strike price far below the current price, because the odds of such a big decline are quite low. Combine that with the overall lack of volatility, and you may find that writing puts isn’t worth the trouble and extra commissions that you’ll pay.

Keep your options open
Right now, it’s better to focus put-writing attention on individual stocks that have gotten hammered hard lately. Apple Inc. (NASDAQ:AAPL) obviously comes to mind after its recent growth disappointment, as panicked investors are paying up for protection from further losses. Similarly, VMware, Inc. (NYSE:VMW) and majority-owner EMC Corporation (NYSE:EMC) both may make good put-writing candidates after VMware’s guidance failed to live up to investors’ high expectations. Despite saying that growth in its licensing business would slow considerably this year, VMware still has plenty of potential, and investors may well have bid down the shares too aggressively.

For the most part, though, when market volatility is low, the best options strategies are ones that involving buying options rather than writing them. As a result, you should wait until more fear creeps back into investors’ minds before trying to capitalize on a put-writing strategy.

The article This Income-Boosting Strategy Is Dangerous Right Now originally appeared on Fool.com and is written by Dan Caplinger.

Fool contributor Dan Caplinger owns shares of Apple. The Motley Fool recommends Apple and VMware. The Motley Fool owns shares of Apple, EMC, and VMware.

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