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For example, you know that ABC's annual report is coming out this week, but do not know whether they will exceed expectations or not. If theoption is going to expire in-the-money and you want to keep thestock you will need to buy the short option back and sell thenext months call. Say you think Google (GOOG) will decrease in price over the next month. You can short 100 shares at $25 a piece for $2500 and want to protect yourself against a rise in the stocks price so you buy calls on Starbucks (SBUX) right at the money because you are conservative. For stock XYZ, let's imagine the share price is now sitting at $63. 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. You buy September 500 Calls for $16 (you have $1000 so you can afford 1 contract (sold in 100 board lots). 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. For more options strategy and Charts visually representing when each strategy should be used and what the potential risks and rewards are please visit my blog. If the price of the stock shoots up, your Call will be way In-The-Money, and your Put will be worthless. If the price of the stock shoots up, your Call will be way In-The-Money, and your Put will be worthless. For example, sell $500 Calls on Google (GOOG) with 1 month to expiration and buy $500 Calls on Google (GOOG) with 6 months to expiration. Fundamentally, the call writer will profit when the stock price remains at or below the strike price as the call will expire worthless while the investor keeps the premium. 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. To successfully trade naked options, an investor must realize that certain options will fit certain scenarios and certain options will not. Remember when you sell an option you seek to capture extrinsicvalue. Sometimes, allyoull need to do is to sell the next month out call. Essentially, the covered put writer is foregoing the right to participate in the depreciation of the stock below the strike price in exchange for receiving the put option premium. Covered call, where you Long the underlying asset and short call options. Your max risk scenario would only occur if the price of the stock went to $0. An option is a contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset at a fixed price on or before a certain date. 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. 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 example, say Google (GOOG) is trading at $500 and you think it will remain near that price over the next month: sell google (GOOG) $500 Calls for $16 and sell google (GOOG) $500 Puts for $15, both with expirations of about 1 month. With the put options on google (GOOG) your risk is limited to you initial investment while your rewards could be substantial. Protected Short Sale: This strategy is implemented by shorting the stock and buying a call option on the stock. 3) Long Straddle: This strategy is the opposite of the Short Straddle; an investor will simultaneously buy a call option and a put option on the same stock with the same strike price and same expiration date. Covered call, where you Long the underlying asset and short call options. When is it used?The Covered Put Sale is used by investors for 2 reasons:. How Do You Choose a Strike Price?Normally, the investor will choose an out of the money option. Some stocks will move depending on which candidate wins and you decide to focus on Starbucks (SBUX).
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