(Learning) How Stock Options Work - Options Trading Strategy

(Learning) How Stock Options Work - Options Trading Strategy - Stock Option Education 717

August 17th, 2008 admin Posted in education |

By optionstradingdomain

When an investor is less bearish, the strike prices used should be closer to the current market price of the stock and the strikes should be closer together. For call options, the option is said to be in-the-money if the share price is above the strike price. If you choose to roll the positionthen you must be somewhat bullish on the stock. If the call is ever exercised, then you would receive the exercise price of the stock, which is the strike price of the call, as well the premium you received when you sold the call. If we close out both positions and sell both options, we would cash in $8.00 + $0.25 = $8.25. An investor is willing to accept a larger risk in exchange for the option premiums received.For example: write XYZ June 20 Puts and Write XYZ June 30 Calls. Say GOOG is trading at $550 at expiration of the call options:. Say you are interested in Apple (AAPL) and think it will appreciate in value or remain the same. 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. You buy calls on Starbucks (SBUX) with a strike of $25 and 1 month to expiration for $1. So in this way, you are protected dollar for dollar. As long as the price of Google (GOOG) at expiration in one month is trading above ($500 (15 + 16) = $469) and below ($500 + (15 + 16) = $531) you have made a profit. 2) Short Combination (Short Strangle): This strategy is similar to the Short Straddle as you write a call and a put option; however, the difference is that with a short combination you use different strike prices. If you want to read more about trading options, click over to David’s site at Discover how to protect yourinvestments with the leveraged power of options. How do you choose the Strike Price?Choosing a strike price will depend on the investors market forecast:. An investor feels a stock will decrease only slightly and is willing to forgo any depreciation in the stock below the strike price of the written put in exchange for the premium received for writing the lower strike price put. Short straddles are purchased if the stock price is not expected to move very much. As an example, say your stock is trading at $29.00 and you feelthat your stock may trade down a little but still remain in anuptrend cycle. However, you do have achoice as to the next month option you are going to sell,whether it be near term or farther out in expiration. The premium for the Call (which is $2 Out-Of-The-Money) is $0.75, and the premium for the Put (which is $2 In-The-Money) is $3.00. As an investor, your strategy takes over once you complete this process and choose your investment opportunity. If the stock were torise quickly and eclipse the $28.50 mark, then with thebuy-write strategy, your position would have maxed out at$28.50, and you would have a $1.50 one month gain. The options used will be identical except for the strike price (use same expiration, same stock). You will be buyingone option and selling another, which is commonly known as aspread and is referred to as a single trade. Short a straddle is used when you are sure that the underlier will be less volatile. The proper strategy will be the strategy thay allows for the highest possible return with the least amount of risk and the best possible protection that can be afforded. As long as the price of Google (GOOG) at expiration in one month is trading above ($500 (15 + 16) = $469) and below ($500 + (15 + 16) = $531) you have made a profit. Some stocks will move depending on which candidate wins and you decide to focus on Starbucks (SBUX). When you feel that you want to lean your covered call strategy(buy-write) a little short, choose to sell an in-the-money callso you can also have some intrinsic value to cover yourdownside. A Call option gives the buyer the right to buy the underlying asset, while a Put option gives the buyer the right to sell the underlying asset.