Home >> Finance >> Investing

Stock Covered Call Options - Options Trading Strategies - Stock Option Trading 337

By: optionstradingdomain

You need to have the right character to be a successful trader. In an ideal world, we would like to be able to clearly predict the direction of a stock. How to choose the Strike Price?The strike prices used will depend on how bearish an investor is. It's important to realize that a winning system is one that consistently delivers profit over a longer time frame - and part of the equation is that a percentage of trades will be losers. There are two types of option contracts - Call options and Put options. As long as the stock moves in one direction more than the amount that you paid in option premium you will profit. The investor implementing this strategy will be expecting the underlying stock chosen to stay at or decrease below the strike price. With this particular strategy, you would purchase protective puts for stocks already owned in order to minimize any losses. Once you start to look at trading stocks, you find yourself plunged into a confusing nightmare where hundreds if not thousands of people are pushing "their" system that is supposedly infallible. When is it used?The Covered Put Sale is used by investors for 2 reasons:. At expiry, as long as the Apple (AAPL) is trading above (120 6 = $114) you have made a profit. However, because you sold the 27.5 calls at $2.00, you wouldonly realize a $1.00 loss in the stock. It's also important not to abandon your system the second you see a trade making a loss. This is often employed when an investor has a short-term neutral view on the asset and for this reason hold the asset long and simultaneously have a short position via the option to generate income from the option premium. For example, if you know a stock which will likely trade relatively flat in short term, then you go covered call, there will be three scenarios:. C) If shares rise above the strike price - the option is exercised, the option has underperformed the shares. If you buy puts and are conservative you could write at the money $500 puts for one month out for say $15. If you have a more neutral view on your stock you would sell anat-the-money-call in order to receive a bigger premium whichallows for greater downside protection if the stock trades downand higher potential profit if the stock becomes stagnant. When an investor contemplates any option strategy, he or she should always be mindful of the risks, since trading options is a bit more risky than simple stocks. However, you need to consider other aspects of the options price like volatility. The straddle strategy is an option strategy that's based on buying both a call and put of a stock. The Bear Call Spread is implemented by buying a put option while simultaneously writing a put option with a lower strike price. For example, say Apple (AAPL) is trading at $120/share and you think the price will remain somewhat stable over the next month but are a bit more causes than the Short Straddle Investor: sell Apple (AAPL) $130 Calls for $2 and sell Apple 110 (AAPL) Puts for $3; both with one month to expiration. Straddle, By engaging in a straddle transaction, buy/sell a call and put at the same strike price, the investor is taking position on the volatility of the underlying security. The options will be identical except for the strike price (use same expiration, same stock). A put option is in-the-money when the share price is below the strike price. Time Spreads (Calendar Spreads): This strategy is implemented by buying and writing an equal number puts or calls on the same stock with different expiration dates but the same strike prices. This way you will receive less option premium but are more likely to make a profit. When youown a stock and intend to hold it for a period of time, you areaware that you will probably be holding it while it goes up andwhile it goes down. An investor feels there is some limited downside for a stock but is not as confident as an outright call writer and as a result buys the higher strike price call to cap upside risk.

About the author

Learn more about Option Trading Strategy >> Options Trading Strategies >> Stock Option Trading

Article Source: http://www.articleretreat.com

More articles in Home >> Finance >> Investing