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 premium and 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.
(Click on the images to enlarge, click on the back arrow to return to this page.)
Sell a put to buy a stock - rather than buy a stock initially, a lower strike put can be sold. If the stock
price isn't below the strike at expiration, then a profit is made on the put premium. If the stock price
falls below the put strike price by opex, the puts will be exercised. The writer keeps the premium and
is obligated to buy the shares at the strike price, but the shares are bought at a lower price than
would have otherwise been done buying the stock initially. Losses on selling puts can be high, so it
is recommended to be accompanied 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 the stock goes
up further, the second OTM call option is sold and an even higher strike call is purchased, and the
process continues like a stair step, to lock in profits and minimize 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 fluctuations 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.
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.
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
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