Covered Call is an options strategy where an investor holds a long position in an asset or stock and writes (sells) call options on the same asset. This is also known as a "buy-write" strategy if this stock is purchased simultaneously when writing the call. Usually the stock is held in the same brokerage account from which the investor writes the option call.
This strategy is used when investor has neutral to bullish overview of underlying stock. Although they believe it has bullish overview in long term, investor also believe it will only have limited price change during the contract life or short term. So to gain additional income they sell call option.
This strategy can only offer limited protection from a decline in stock price and also limited profit when stock increase in price because it will need to cover the option. Investor can also get the benefits of underlying stock ownership, like dividends and voting rights.
To summarize it, covered call has limited profit and substantial loss probability. Maximum profit will happen if the price of stock you own is at or above the call option's strike price. Substantial loss will occur when stock price continues to decline with the written call expires. You can calculate your loss as the start stock price less its current market price, less the premium received from the sale of call option. Any loss from the stock is offset by the call option premium.
This strategy is often considered as conservative strategy. But this is not true. To have a profitable covered call strategy, investor need to guess correctly that share values will not drop significantly. I can say that this strategy is very dangerous because if stock sanks you could lose many money. So use this strategy when you are very certain that the price won't move a lot.
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Saturday, July 24, 2010
Saturday, July 10, 2010
Long call
In option trading there are two player, the seller and the buyer. If you buy a call, that means you are having long call position. Long call gives the owner the right to buy the underlying asset in the contract, but not an obligation.
For example, Alan and Tom agreed on a call options contract where Alan will buy from Tom, 100 shares (equivalent to one option) of Company XYZ at $20 which will expire on the third Friday of September. We call the $20 as strike price. Currently the price of stock XYZ is $25. He bought the option for $5. This is called the Option Premium.
At the expiry date or also called maturity date, the share price of Company XYZ remains at $25. Alan can exercise his right to buy the share for $20 and make $5 profit. If the share price goes down to $21, Alan can still profit $2 by simply exercising his rights.
The Long Last Call
However, if stock XYZ price goes down below $20 on the maturity date, for example drop to $15. The option will be too expensive for Alan so he can ignore the contract. If he wants to buy the stock, he can just buy it from the market. He don't need to exercise the option. In this case, Alan will only lose the amount he paid for the contract which is $5. Tom, on the other hand will keep the stock and the premium, which is his profit.
A long call is a bullish strategy. Trader will enter the position if he thinks the price will go up. This is a basic strategy and the most common choise for option trader beginner.
With long call, your loss will be limited to the premium paid up front for the option, and your gain will be unlimited depends on how much the stock rallies.
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For example, Alan and Tom agreed on a call options contract where Alan will buy from Tom, 100 shares (equivalent to one option) of Company XYZ at $20 which will expire on the third Friday of September. We call the $20 as strike price. Currently the price of stock XYZ is $25. He bought the option for $5. This is called the Option Premium.
At the expiry date or also called maturity date, the share price of Company XYZ remains at $25. Alan can exercise his right to buy the share for $20 and make $5 profit. If the share price goes down to $21, Alan can still profit $2 by simply exercising his rights.
The Long Last Call
However, if stock XYZ price goes down below $20 on the maturity date, for example drop to $15. The option will be too expensive for Alan so he can ignore the contract. If he wants to buy the stock, he can just buy it from the market. He don't need to exercise the option. In this case, Alan will only lose the amount he paid for the contract which is $5. Tom, on the other hand will keep the stock and the premium, which is his profit.
A long call is a bullish strategy. Trader will enter the position if he thinks the price will go up. This is a basic strategy and the most common choise for option trader beginner.
With long call, your loss will be limited to the premium paid up front for the option, and your gain will be unlimited depends on how much the stock rallies.
Learn option strategies and make profit now. If you want to learn more about option join stock option newsletter.
Sunday, July 4, 2010
Put option
Put option strategy
April 3rd, 2010 | admin | No Comments#comments">No Comments Yet
In put options, the buyer has the right to sell an asset to the writer (the seller). Just like the call asset, it is bounded by a contract which states that the underlying asset will be sold at a particular price and a particular date. But the similarity ends there. In put options, the writer has to buy the underlying asset at the strike price if the buyer exercises this option.
Let us continue with John and Tom. John bought call options from Tom. But he could also buy put options from Tom. If John buys put options, it means that he buys the right to sell Company A’s shares at $20 on April 1. If the price of shares goes down below $20 on the expiry date, John can exercise his right and can still sell it at $20, thus making a profit.
Buying put option allows investors to earn when price of shares drops at the end of the contract.
Profit potentials are unlimited for the buyers of put options, especially if the market begins to sell off. On the other hand, risks are limited if the market goes against them.
April 3rd, 2010 | admin | No Comments#comments">No Comments Yet
In put options, the buyer has the right to sell an asset to the writer (the seller). Just like the call asset, it is bounded by a contract which states that the underlying asset will be sold at a particular price and a particular date. But the similarity ends there. In put options, the writer has to buy the underlying asset at the strike price if the buyer exercises this option.
Let us continue with John and Tom. John bought call options from Tom. But he could also buy put options from Tom. If John buys put options, it means that he buys the right to sell Company A’s shares at $20 on April 1. If the price of shares goes down below $20 on the expiry date, John can exercise his right and can still sell it at $20, thus making a profit.
Buying put option allows investors to earn when price of shares drops at the end of the contract.
Profit potentials are unlimited for the buyers of put options, especially if the market begins to sell off. On the other hand, risks are limited if the market goes against them.
Call option
Call option strategy
April 3rd, 2010 | admin | No Comments#comments">No Comments Yet
In simple terms, call options give the owner the right to buy the underlying asset in the contract. Again, it is not an obligation.
For example, John and Tom agreed on a call options contract wherein John will buy from Tom, 100 shares (equivalent to one option) of Company A at $20 (strike price) what will expire on the third Friday of April. The current price of the share is $20.
At the expiry date (also called maturity date), the share price of Company A remains at $25. John can then exercise his right to buy the share for $20 and thus, yielding $5. Meanwhile, if the share price goes down to $22, John can still earn $2 by simply exercising his rights as stated in the contract. In whichever way, any amount higher than the strike price at the end of the contract will become the profit of the owner. But before it can happen, the owner who decides to pursue his right has to have his money ready to pay for the amount.
However, if the share price goes down below $20, say $18, on the maturity date, it will be too expensive for John so he can just ignore the contract since he is not obliged to carry it out. He will only lose the amount he paid for the contract called the Option Premium. Tom, on the other hand will keep the asset and the premium, which in a sense, is his profit.
April 3rd, 2010 | admin | No Comments#comments">No Comments Yet
In simple terms, call options give the owner the right to buy the underlying asset in the contract. Again, it is not an obligation.
For example, John and Tom agreed on a call options contract wherein John will buy from Tom, 100 shares (equivalent to one option) of Company A at $20 (strike price) what will expire on the third Friday of April. The current price of the share is $20.
At the expiry date (also called maturity date), the share price of Company A remains at $25. John can then exercise his right to buy the share for $20 and thus, yielding $5. Meanwhile, if the share price goes down to $22, John can still earn $2 by simply exercising his rights as stated in the contract. In whichever way, any amount higher than the strike price at the end of the contract will become the profit of the owner. But before it can happen, the owner who decides to pursue his right has to have his money ready to pay for the amount.
However, if the share price goes down below $20, say $18, on the maturity date, it will be too expensive for John so he can just ignore the contract since he is not obliged to carry it out. He will only lose the amount he paid for the contract called the Option Premium. Tom, on the other hand will keep the asset and the premium, which in a sense, is his profit.
Saturday, July 3, 2010
Bear call spread
Bear call spread
June 29th, 2010 | admin | No Comments#comments">No Comments Yet
The bear call spread strategy is used when we thinks that the price of underlying asset will go down moderately in near term. If you think the price will go down a lot, I suggest don’t use this strategy. There are better strategy for that condition. It is implemented by selling an in-the-money (ITM) call option (has higher price) and buying an out-of-the-money (OTM) call option (has lower price) on the same underlying stock with the same expiration date. bear call spread has limited profit and risk. This type of strategy is known as credit spread where you will get income when entering the position. The amount received by selling higher strike call option is higher than the cost of purchasing call with lower strike.
To understand better, here’s an example. Stock XYZ is trading at $40, and we think it is going to drop soon moderately, so we enter a bear call spread by buying a September 45 call for $100 and writes a September 35 call for $300. Thus, we receives a net credit of $200 when entering this position.
If XYZ begins to drop and closes at $34 on expiration date, both options expire worthless and we keep the entire credit of $200 as profit. This is the maximum profit you can get.
If XYZ goes up to $46, both options expire in-the-money. The September 35 call will have an intrinsic value of $700 and the September 45 call will have an intrinsic value of $200. This means that the position is now worth $500 at expiration or $500 loss. Since we had received a credit of $200 when entered the spread, our net loss comes to $300. This is the maximum loss you can have.
The above example did not take commission charges for easy understanding. But you must know the profit and loss also depends on the commision from your brokerage.
June 29th, 2010 | admin | No Comments#comments">No Comments Yet
The bear call spread strategy is used when we thinks that the price of underlying asset will go down moderately in near term. If you think the price will go down a lot, I suggest don’t use this strategy. There are better strategy for that condition. It is implemented by selling an in-the-money (ITM) call option (has higher price) and buying an out-of-the-money (OTM) call option (has lower price) on the same underlying stock with the same expiration date. bear call spread has limited profit and risk. This type of strategy is known as credit spread where you will get income when entering the position. The amount received by selling higher strike call option is higher than the cost of purchasing call with lower strike.
To understand better, here’s an example. Stock XYZ is trading at $40, and we think it is going to drop soon moderately, so we enter a bear call spread by buying a September 45 call for $100 and writes a September 35 call for $300. Thus, we receives a net credit of $200 when entering this position.
If XYZ begins to drop and closes at $34 on expiration date, both options expire worthless and we keep the entire credit of $200 as profit. This is the maximum profit you can get.
If XYZ goes up to $46, both options expire in-the-money. The September 35 call will have an intrinsic value of $700 and the September 45 call will have an intrinsic value of $200. This means that the position is now worth $500 at expiration or $500 loss. Since we had received a credit of $200 when entered the spread, our net loss comes to $300. This is the maximum loss you can have.
The above example did not take commission charges for easy understanding. But you must know the profit and loss also depends on the commision from your brokerage.
Bull Put Spread
Bull Put Spread
June 27th, 2010 | admin | 4 Comments#comments">4 Comments
The bull put spread strategy is used when we thinks that the price of underlying asset will go up moderately in near term. If you think the price will rise a lot, I suggest don’t use this strategy. There are better strategy for that condition. It is implemented by selling an in-the-money (ITM) put option (has higher price) and buying an out-of-the-money (OTM) put option (has lower price) on the same underlying stock with the same expiration date. Bull put spread has limited profit and risk. This type of strategy is known as credit spread where you will get income when entering the position. The amount received by selling higher strike put option is higher than the cost of purchasing put with lower strike.
To understand better, here’s an example. Stock XYZ is trading at $40, and we think it is going to rally soon moderately, so we enter a bull put spread by buying a September 35 put for $100 and writes a September 45 put for $300. Thus, we receives a net credit of $200 when entering this position.
If XYZ begins to rise and closes at $46 on expiration date, both options expire worthless and we keep the entire credit of $200 as profit. This is the maximum profit you can get.
If XYZ decline to $34, both options expire in-the-money. The September 35 call will have an intrinsic value of $200 and the September 45 call will have an intrinsic value of $700. This means that the position is now worth $500 at expiration or $500 loss. Since we had received a credit of $200 when entered the spread, our net loss comes to $300. This is the maximum loss you can have.
The above example did not take commission charges for easy understanding. But you must know the profit and loss also depends on the commision from your brokerage.
June 27th, 2010 | admin | 4 Comments#comments">4 Comments
The bull put spread strategy is used when we thinks that the price of underlying asset will go up moderately in near term. If you think the price will rise a lot, I suggest don’t use this strategy. There are better strategy for that condition. It is implemented by selling an in-the-money (ITM) put option (has higher price) and buying an out-of-the-money (OTM) put option (has lower price) on the same underlying stock with the same expiration date. Bull put spread has limited profit and risk. This type of strategy is known as credit spread where you will get income when entering the position. The amount received by selling higher strike put option is higher than the cost of purchasing put with lower strike.
To understand better, here’s an example. Stock XYZ is trading at $40, and we think it is going to rally soon moderately, so we enter a bull put spread by buying a September 35 put for $100 and writes a September 45 put for $300. Thus, we receives a net credit of $200 when entering this position.
If XYZ begins to rise and closes at $46 on expiration date, both options expire worthless and we keep the entire credit of $200 as profit. This is the maximum profit you can get.
If XYZ decline to $34, both options expire in-the-money. The September 35 call will have an intrinsic value of $200 and the September 45 call will have an intrinsic value of $700. This means that the position is now worth $500 at expiration or $500 loss. Since we had received a credit of $200 when entered the spread, our net loss comes to $300. This is the maximum loss you can have.
The above example did not take commission charges for easy understanding. But you must know the profit and loss also depends on the commision from your brokerage.
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