options for portfolio building

I think they call this market "range bound". It goes up a bit, down a bit, some good news, some not so good news. Corporations have cut overhead, cut inventoray, are increasingly looking profitable at the same time that unemployment stays high, housing prices drift, foreclosures continue to increase. The government has engaged in massive deficit spending, may need to do some more, in spite of an increasingly toxic political environment for big spending.

So how do I behave in this situation? I have always believed in staying invested, as one never knows when the market is going to turn. On the other hand, smarter investors then me are saying one should keep one's cash position sizable, so that one is in a position to buy when the market bottoms out. Hmmm...where's a guy to settle when that kind of conflict is raging inside.

I've been reading about options. They are complex, and at their highest sophistication, look like a form of gambling.
It seems, however, that if one wants to boost returns in a stagnant market, selling calls and puts is an opportunity to boost cash earnings and also position cash to be deployed at lower than market prices for equities.

The covered call is a means to wring some cash out of those optimists who are sure that a stock will rise and they will want to purchase it at a discount. As the call seller, you get the price of the stock at your strike price, plus the value of the call premium you sold as your return for selling the call. If you really want to hold that equity, you may be forced to buy your call back at closer to the expiration date, but you can then sell another call at a higher strike price if the equities value is rising.

The cash-covered put is another way to keep your and purchase an equity at lower than current price. If the put buyer forces you to purchase as the equity falls below your strike price, your cost is the strike price mminus the value of the put you sold, assuring you of a lower entry point for the stock than you would have achieved, had you purchased the stock outright, rather than selling the put and reserving cash to cover the placement of that put. What you miss the put is collecting dividends on the stock you are hoping to purchase at that lower price. I guess it makes sense to sell the put, hope to be assigned the stock if the price drops below the strike price, then look to purchase the issue just before the next ex-dividend date if the put you sold is not assigned. Your purchase price will be the list price minus the value of the put you sold.

If you are using these tools to actually build a portfolio of dividend paying stocks, rather than simply betting on the movement of stock prices in an attempt to earn cash on the options for equities you don't own, you are reducing risk in your portfolio. You collect a premium for selling options on equities you own when most of those options will never be excercised (i.e. your stock will seldom be called away from you) and you earn a premium for agreeing to purchase a stock at a lower price than it's current price, and your price is even lower than the strike price when you figure in the value of the premium.

So, I'm looking to sell short-term puts in equities I'd like to own, taking care to avoid missing dividend payments by keeping the option terms short and I'm looking to sell calls on stocks I own, but would be willing to see called away at a higher price plus the premium value of selling the call.

What I won't do is sell un-covered calls or sell puts when I don't have the cash to cover a potential placement of stock in my hands, or don't wish to own the stock in the first place.

My portfolio tracking tool isn't sophisiticated enough to actually track my earnings on this strategy, but as long as I'm careful in my selling, I should always either end up with a bit of extra cash, or a new equity position that I wanted anyway.

we'll see where this leads.