Have you ever suggested to your stockbroker that you were interested in trading options? More than likely he (your broker) tried to talk you out of investing in options. Quite possibly, he insisted that options were high risk and only professional traders should use options in their investments.
Well, let me let you in on a little secret. The reason why your broker doesn’t want you to trade options is because your broker does not know how to trade option properly. Understand, most stockbrokers are sales people, not investors. They offer what is hot in the market and usually push you towards managed money. The reason being is because your stockbroker gets paid to direct your capital into funds where portfolio managers manage stocks and bonds in anticipation of beating the market indices.
A true investor and some very well trained stockbrokers (hard to find these brokers, but there are some out there somewhere) will tell you that option trading is a very lucrative investment and less risky than what your broker is suggesting. Option trading strategies can increase your return on your overall portfolio by leveraging and insuring the stocks in your portfolio.
Option trading strategies, range from creating income into your portfolio on a monthly basis, insuring any downside in a particular stock you may be holding in your portfolio and a way to leverage both the upside of the market and the downside, all at the same time.
Now, if you are like me and want to see your portfolio increase in value overtime, while having the opportunity for income, (which everyone reading this is probably saying no $#!t) then you need to learn all the option trading strategies that are available to you.
To give you an example of a great option trading strategy that you can implement right now is the selling of covered calls. This simple option trading strategy will allow you to take an underperforming stock in your portfolio and create a monthly income. How this option trading strategy works is as follows:
Step 1. You own a stock in your portfolio that is either stagnant in your portfolio (meaning not moving up or down), or the stock has dropped way below your purchase price.
Step 2. You sell a call option on this stock. Basically, for every 100 shares of the stock you own, you can sell 1 call option related to that stock. (Example is you own 500 shares of ABC stock, you can sell 5 ABC call option contract). This scenario is selling a covered call.
Step 3. You collect a premium from the sell of the call option. (These premiums vary depending on the volatility of the stock and the amount of time left on the option contract.
Step 4. Now you sit back and see what the market will do for you. For example, the stock may move down in value and the call option will expire worthless, meaning you keep the premium and sell new call options next month, or the stock stays stagnant and does not move during the month. Again you would keep the premium and write another call option against your stock. The last scenario is the stock starts to increase in value and you have to sell the stock for the strike price of the call option. Typically, if the stock you have has a high volatility, you probably would not use this option trading strategy. But, it is your decision.
Now, here are a few items I left out of the above scenario. You can sell your call options in the money, out of the money or at the money. We will discuss the terminology of these positions in a later article. But for now, I hope you see the value of option trading strategies in your stock portfolio.
Please come back soon to learn more about different option trading strategies to increase your overall return in your portfolio. You can also subscribe to this page and get future updates sent directly to your email box. Just click the rss feed at the right.
The Riskiest Option Trading Strategy Known To Man.
Today, I wanted to discuss the riskiest Option Trading Strategy known to man. I am going to go through the strategy and then I am going to give you the names of two other strategies that you will want to stay away from because each one of them is using the risky trade within the strategy. So, let’s get started.
The Option Trading Strategy with the highest risk to an investor is known as selling naked calls or short a call. How this strategy works is as follows:
1. You find a stock you think will not have much upside nor volatility, aka SPECULATING. This should be your first indication that this strategy should not be used.
2. You sell a call naked (this means you do not own the stock, but, you are obligating yourself to selling this specific stock sometime in the future at a predetermined price.)
3. You receive a premium (meaning someone is paying you to have the right to buy the underlying stock, that you do not presently own, from you sometime in the future.)
4. Now, this is where this strategy can get UGLY!! READ BELOW
Selling naked calls (short a call) is gambling. You receive a premium from an investor that gives him the right to buy either from the market or from you, whomever is cheaper. Consider the example below.
You sell one (1) naked call on ABC stock at a strike price of $20. The buyer of your naked call pays you $3. (Alright, you just made $3 per contract, or $300.00)*
The current market price of the stock is $15.
Sounds good so far huh? You have $300 and the stock would have to move from $15 to above $23 ($20 strike price plus the $3 premium) before the person holding the call option would come to you and have you buy the stock at the market price and sell it to him for $20. Well, just to let you know, because there is no ceiling on how high the price of the stock can climb, your risk is UNLIMITED!!
Let say you wake up one morning three weeks into the future and find out the stock that was trading at $15 back when you sold the naked call just spiked up $50 per share. Well, guess what, the person that bought the call from you is doing? He is outside banging down your door to get you to sell him the stock at $20, so he can sell it in the market at $65. What an ugly predicament you are in now. You have to buy the stock at $65 and turn around and relinquish it at $20 leaving you with a loss of $42. (Your cost of $65 minus what you sold it for $20 equals $45. But remember, you were already paid $3, so your loss is $43 per share or $4300.00) OUCH!!
Now granted, this is an extreme example, but it is better to just stay away from selling naked calls so you don’t end up on the wrong side of a run away stock while you were sleeping. Get my drift.
Well, hopefully you understand the risk involved in selling naked calls now, here are two other option trading strategies to avoid like the plague:
short straddle: short a call and short a put
short combination: short a call and short a put (combination will have different strike prices, i.e. sell a 20 call and sell a 30 put)
* One (1) contract equals 100 shares of stock, therefore if you receive $3 per contract, you will receive as a premium $300.00.
To Your Successful Trading,
p.s. Here are some additional articles you may be interested in
- Stock Option Trading Millionaire Principles – Jason Ng explains some critical elements that will guide you to consistent profitability in options trading. stocks options option trading Stock trading options trading
- Options Warrants Futures Derivatives Headquarters – Articles about option trading strategies, option pricing, Black Scholes, Spread betting and … or just give a thumbs up? Be the first to submit a blurb! …
- Option Trading Explained – in layman terms – Explaining Options Trading In Layman Terms. Possibly the only writing in existence that tells you both the good and bad effects of option trading. options option …