OptioNewton

Bullish Strategies

The strategies presented here are intended to be low maintenance mid term strategies. That is, ones that can be implemented monthly or quarterly with minimal risk and modest returns. If interested in daytrading options there are other sites more suited for that approach.

Buy a stock - the advantages of buying a stock is there is no time limit and no time premiumand the profit potential is unlimited. On the other hand the amount of capital required is much higher than buying an option to control an equivalent amount of stock and there is no limit on the loss. Because of the 50-50 random coin toss nature of stock price movements, no investor should jump full in when buying a stock position. It should be done in two or more steps. In fact dollar cost averaging is a good way to buy stock. That is, buying a set value amount of a variety of stocks every month.

Buy a call - when buying a call, as with any investment, the trader wants to maximize the upside and minimize the downside. We can look at a Call Put curve to help optimize the selection. ITM options will move penny for penny with the stock price. ATM calls will move penny for penny with the stock on the upside and move at a fraction of the stock price on the downside.

Sell a put to buy a stock - rather than buy a stock initially, a lower strike put can be sold. If the stock doesn't expire below the put strike, then a profit is made on the put premium. If the stock price falls and is below the put strike price on opex, the puts will be exercised where the writer keeps the premium and is obligated to buy the shares at the strike price buying the shares at the lower price than would have otherwise been done buying the stock initially. Losses can be high on this strategy, so it is recommended to be accompnaied with the simultaneous purchase of a lower strike put.

Buy Write - is the simultaneous purchase of the stock and the writing of, usually, an OTM call. This in effect reduces the price of the stock. If the stock goes above the strike of the call, the stock and option will counteract each other. This puts an upper limit on the profit of the stock movement. One way to overcome this is to buy a higher strike call at the same time the buy write is executed. As the stock moves up, the higher strike call is sold for a profit and the next higher price OTM call is bought. This locks in the profit of the original OTM call, allows the purchaser to take advantage of further upside movement, but also limits the losses of the profits just made if the stock pulls back. If th estock goes up further, the second OTM call option is sold and an even higehr strike call is purchased, and the process continues like a stair step, to lock in profits and minimiz their loss. The downside to the original buy write is it provides on minimal protection to a drop in stock price. To provide protection for a downward movement, an OTM put can be purchased at the time the buy write is executed. This is a Collar and is included in the Bearish & Protective section also. The credit received for the written call should cover much if not more than the debit by the purchase of the put. If the stock continues down the put is also stair stepped as was the OTM cal, to lock in profits on it. These profits in the OTM options counter the losses in the written option or the stock price.  As the stock fluctuates, the options tied to the stock can be traded for profits off the fluctations in the stock, while at the same time providing some hedging against losses in the stock. The buy write can be the basis for many Stock & Option Strategies, so it's discussed in much further detail in that section. For now we'll try to stick to option strategies to establish an understanding of the risk and rewards.

Spreads

Bull Call Spread - involves buying an ITM call and selling an OTM call. This is illustrated as -

Bull Put Spread - involves selling an ITM put and buying an OTM put. 

Combinations

Buy a call and sell a put at the same or lower strike -  This strategy is in effect like buying half a stock position and waiting to see if the market pulls back to buy the other half of the position. If the stock goes up, a profit is made on the call appreciation and the put time value depreciation. If the stock price goes down, the money is lost on the call, but the stock is assigned at the lower strike price. As with selling a put alone the losses can be very high.

The number one priority in any investment is to minimize losses. The less risk taken however, the lower the reward. That's why the first step in choosing a strategy is to decide which direction the market or the stock may move. If it is unknown or it could go either way, then the strategy would be nuetral.