Have we moved too far too fast? It's tough to say in the short-term. Remember, however, that stocks are still 50% below their October 2007 highs. The S&P 500 is holding over 800, nearly 17% above its recent lows, while the VIX is routinely sniffing 40. If you do have some reservations about this recent rally, one option play to consider right now would be covered calls. With volatility still relatively high, playing covered calls on stocks you already own at this point makes sense, especially if your stocks have experienced recent rallies. Let this current level of implied volatility assist you in reducing your cost basis and generating income while still holding your stocks for potential long term gains. Take advantage of the rich premiums. You haven't missed the boat just yet on selling pricey options.

Let's take a look at a candidate that has experienced some substantial short term rallies and are prime candidates for employing covered calls:

AMZN

Fueled by strong earnings in January, AMZN has rallied these past two months from $50.00 up to $72.40, a nearly 50% gain in only two months. If you own the stock, you are pretty ecstatic with those short-term returns. But now what do you do? Think about selling calls against your long stock position at this point. AMZN has had recent difficulties settling above $75.00. If you recognize this, consider selling the April 75 calls; you can collect $2.94 of premium, or $294.00 for every 100 shares of stock of AMZN that you own. AMZN April implied volatility is still a whopping 63%. With the stock currently trading $72.40 per share, you collect 4.06% (2.94/72.40) over the next 22 days before April expiration from the sale of the call. If you currently own AMZN stock, the sale of the call for $2.94 provides protection if the stock sells down to $69.44 while allowing for price appreciation up to $75.00 in the stock.

There are many of stocks of late that have seen incredible rallies in their respective stock prices. Take your pick amongst the financials. Do your homework, and you can find a plethora of covered call opportunities in this market. Happy Trading and see you next time.

thinkorswim, Inc. and its registered employee, Joe Mazzola, do not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.