Powerful Hidden Techniques Mystery Formula - The Covered Call Option Trading Buy-Write Strategy
For better or worse, most option trading investors purchase stocks with the intent of holding their shares for an extended period of time. We do this mainly because the media and industry professionals have drilled into our heads, year after year, time after time, that it’s best to buy and hold. The recent bull market phenomenon also fueled this mindset because the buy and hold strategy worked extremely well - for a while. Whether or the not the buy and hold strategy is still the most efficient way of option trading and investing remains a topic for discussion. However, it is still the strategy that most option trading investors are comfortable with and tend to follow. The first strategy we will discuss is a hybrid of the buy and hold strategy, one that provides for better and more consistent returns a large majority of the time when compared to naked stock ownership alone. When we buy a stock, there are three possible outcomes. As we discussed previously, two of these scenarios are generally negative and only one outcome is generally positive. If the stock goes up, that is good. If the stock goes down, that is bad. And if the stock stays still, that is also a bad outcome. To briefly recap, not only do you have a loss in opportunity cost (the money invested in your stagnant stock could be making you money if somewhere else) but also, you have incurred commission costs on both the way in and way out. So, in this case, only one of the three scenarios provides a positive return. For the sake of description, we will identify the three potential scenarios as the up scenario, the down scenario and the stagnant scenario. By employing the covered call or buy-write strategy, you can change the outcome of the scenario profile so you have two positive potential results instead of only one. Employing the covered call or buy-write, we still have the up scenario as a positive result, but now the stagnant scenario will also produce a positive result since we collect a premium and the third scenario, the down scenario will not be as negative. Thanks to the covered call strategy, now two of three scenarios end in a positive result and the third has a result that is less negative. Let’s take a closer look at the covered call strategy and its construction. There are two components of the covered call strategy, the stock component and the option component. The stock component consists of a long stock position (you own stock). The option component consists of selling one call per every one-hundred shares of stock owned. Remember, one option contract is worth one hundred shares of stock. So for example, 1000 shares of stock equals 10 call contracts or 200 shares equals 2 call contracts. The chart below shows more examples of the proper construction of buy-writes. Please take special note that the ratio of stock to calls must be exactly 100 shares to 1 option contract. Number of Call Contracts
Shares to
Owned Sell 100 1
300 3
1700 17
9200 92
14500 145
267000 2670 The philosophy behind the covered call strategy is not complicated. It entails using a long stock position along with a short call option to create a positive stream of additional income, much in the same way a person would purchase a house and then lease it out to collect rent in order to pay for the mortgage. Another analogy is that of the insurance company. An insurance company receives premiums month in and month out. Over a period of time, this constant stream of income easily builds to a point where it outweighs any pay out the insurance company may face, even for catastrophic events. The constant and reoccurring collection of option premiums works better if done over longer periods of time (for example, one year.) That time frame allows the odds to play into your favor. Now let’s talk about the odds. There have been several studies done on the topic of premium buying versus premium selling. The goal of the studies was to determine whether it is better to buy options or sell options. Recent studies have found that selling the premium was the correct trade 78% to 83% of the time. That is a very high percentage and is worth taking advantage of when a good opportunity presents itself. The covered call strategy takes advantage of the fact that an option trading is a depreciating asset because its extrinsic value goes to zero at expiration. The process by which an option’s extrinsic value dissipates is called time decay. -=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-
If You Would Like to Learn More About Options Trading
Responsibilities Then Discover How to Protect Your Investments
With the Leveraged Power of options & Learn How to Trade Options
Like the Pros..
Click Here --> http://www.meta-formula.com/options
-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-
Related News
|
 |
|
|
RELATED ARTICLES
Chinas Great Missed Opportunity
While a U.S. Representative to the Asian Development Bank Executive Board of Directors during the first Bush Administration, I consistently called for China to "bite the bullet" and privatize its state-owned companies as soon as possible. Representatives from European and other Asian countries would just shake their heads and mutter about impatient Americans while counseling that China adopt a slow, incremental approach to privatization.
Success Trading: Some Basic Terminology for New Traders
The world of trading can get very complex because the financial markets are complex. There thousands and thousands of successful traders out there today. The amazing thing is that they all have carved their own niches and approach the markets in a unique way. This should be wonderful news for beginning traders because it demonstrates that there are thousands and thousands of different ways to proper in the markets. It's just a matter of discipline and finding the approach that suits your style and personality. With all that being said, new traders must begin somewhere, so let examine some basic terms and approaches to the markets.
Day Trading the SP Futures with Initial S/R and the NYSE TICK
For instance, if the market moves up in the first 20 minutes of trading, touches the initial resistance zone, and then turns down, this implies that a good tradable downtrend move is likely to develop.
Almost Anyone Can Open A Roth IRA!
The Roth is kind of weird until you get used to it in terms of how much you can put in (contribute) each year depending on how much you earn (compensation). Because of this you really have two limits, one dealing with your compensation and the other dealing with your contribution. Let me explain.
5 Ways To Protect Your Bond Portfolio From Rising Interest Rates
The Federal Reserve recently raised its target federal funds rate for the first time since March 2000. This could be just the tip of the iceberg, though, as many experts believe rising inflation and a strengthening economy will spur continued rate hikes for the foreseeable future.
Stock Market Retirement Investment Plan
For a successful retirement investment plan to work in the
stock market, some 'reasonably sure' assumptions would have
to be made:
How Do I Start Investing Online and What Are Some Basic Tips?
If you are new to investing online, don't put your entire life savings into an online account. Start with a smaller sum, which will be easier to handle and keep track of. Once you feel confident, you can then decide to add more money to your investing online account.
Stock Market Horizons: Gold $3,000, Oil $70
In the last two decades, even though gold prices have dwindled from $850 to $350 an ounce, there are still market gurus who predict gold price to hit $3000 an ounce. Hecla seems to be quite bullish about the future.
Investing Pointers for Neophyte Investors
If you know next to nothing, how do you go about the business of investing? The first thing you need to know about investing is, how much do you really know? If its' not much, then you will need to read extensively to educate yourself.
Emotions: A Traders Worst Enemy; Get Rid of Fear and Greed - Youll be Glad You Did
You hear it over and over and over in books, forums, and chatrooms. Fear and greed, fear and greed, fear and greed. Emotions are a trader's worst enemy. What are we supposed to do about it? We are human after all. Human beings have emotions. We can't just throw a switch and suddenly behave like "Data" on Star Trek the Next Generation.
Your Portfolio and ?Old Ironsides?
The USS Constitution first ventured into the waters in 1798. From there she became an icon of durability and success.
Pros & Cons of Investing in Bonds
What are Bonds?
Guru Focused: Robert Olstein?s Short Sells
While it is rather rare that value gurus sell stocks short, Robert Olstein has been selling short in his Financial Alert Fund. The accountant-turned fund manager spots values by looking behind the numbers. In the second quarter of 2004, Robert Olstein sold short American Italian Pasta Co. (PLB) at $31. After about 6 months he covered at $20, easily made more than $1 million for his fund. Currently he is shorting two stocks: Computer Sciences Corp (CSC) and Fleetwood Enterprises Inc (FLE), although things do not always go that smoothly.
When Its Too Late to Save for Retirement
You are 55 years old (or somewhere around
there) and your company is going to force you to
retire at 65. You have $35,000 saved in your
401K and that's all. The house will be paid for
by then so you will have a place to live. The
company pension will pay about $1,000/month and
so will Social Security. What will my life style
be like at that time?
Have You Ever Seen A Map of the World Turned Upside Down?
For those accustomed to viewing things a certain way, it is quite disconcerting. One almost expects the ocean to pour out. It just seems wrong. Yet, the way we view the globe is entirely arbitrary, based largely on the way we've always seen it.
Everybody Wants to Know How to Invest
Those unfamiliar with the process of making and managing investments often have more than a few trepidations about investing in general. They figure that, since they do not know how to invest, they will never learn. Of course the horror stories of investors who lost their life savings on some bad deal don't help people to feel any less secure when figuring out how to invest.
The Economy Is Not The Stock Market
Several days ago, the Commerce Department reported that May's factory orders had increased by a 2.9 percent. This was well covered by 'the press', as it was to be a positive influence on 'the market' (yes, the quotes are intentional.....you'll see why). The enthusiasm was understandable - the $394 billion in orders of manufactured goods is the highest level seen since the current calculation method was adopted. Although being skeptical can be wise, the figure was (and is) a clue that the economy is on a solid footing. However, too many times there's a disconnect between what 'should' be the result of a piece of economic data, and what actually occurs. The economy isn't the market. Investors can't buy shares in factory orders......they can only buy (or sell) stocks. Regardless of how strong or weak the economy is, one only makes money by buying low and selling high. So with that, we put together a study of some of the economic indicators that are treated as if they affect stocks, but really may not.
Straddle Strategies in Option Trading
The straddle strategy is an option strategy that's based on buying both a call and put of a stock. Note that there are various forms of straddles, but we will only be covering the basic straddle strategy. To initiate a Straddle, we would buy a Call and Put of a stock with the same expiration date and strike price. For example, we would initiate a Straddle for company ABC by buying a June $20 Call as well as a June $20 Put.
Annuity Help
Many people today are looking for annuity help. The biggest challenge seems to be that most of the help is biased. What exactly do I mean? I mean that there is always a vested interest for the person who is helping you with your annuities. They are out to sell you something so you don't know if they are doing it for your best interest or for theirs.
Profitability And Stock Turn Rate
The inventory of the typical store represents the largest single element of its total assets. The sale of goods from this inventory is the merchant's chief source of operating profit. Thus, the way in which this merchandise investment is put to work is of utmost importance in achieving a profitable operation.
|
Comment by Frank O'Donnell
