Think of buying call options like this, keeping in mind that this is a slightly simplified example:. You have an inclination that GOOG ticker symbol for Google is going to increase quite a bit because they have a new product rolling out. Buying one call option contract allows you to control shares of stock without owning them outright, for a much cheaper price. Because you don't have enough money to exercise the option, you would choose to take the profits and close the trade out.
Unlike owning stock which has no expiration , owning a call could result in either a full loss of the call's value, or unlimited profit potential at expiration. The purchaser is not obligated to buy the stock at expiration because they can sell the call at any point in time as long as the underlying is liquid enough.
10 Ways to Sell Naked Puts Safely
The drawback of owning a call is that there is no long-term residual value. Now that you understand the basics of buying call options, let's dig into how the purchase of a call option affects the amount of money in your account aka your buying power. In a brokerage account, the buying power reduction of buying a call is equal to the debit cost paid to put on the trade.
Buying power reduction is equal to the debit paid for the trade as seen on the tastyworks trading platform. Now, let's take a look at when your long call will be profitable and when it will expire worthless. A long call can be purchased in the money or out of the money, which I will explain next. Below is an example of buying a call option that is 'in the money' ITM.
SAFE OPTION STRATEGIES
The math looks like this: To improve your probability of winning in this game, it is far wiser to write calls when stock prices in general are moving down and write puts when stock prices are moving up. This strategy will put the odds in your favor. However, writing naked call options in bull markets can be profitable, as can writing naked puts in bear markets, because of the inherent advantage the naked option writer holds.
By following these rules, you will improve your probability of winning the game and reduce some of the risk.
Better Education Leads to Better Trades
Your profits will be much greater in the naked option writing game if you write calls when the underlying stock is moving downward and write puts when the underlying stock is in an uptrend. The best way to project this type of price behavior is to look at the underlying trend of each of the optionable stocks. Never buck a strong uptrending stock, or in Wall Street parlance, "Don't fight the tape. While the option buyer always hunts and pecks for options on stocks that are extremely volatile, the option writer loves stocks that don't move anywhere.
He wants stocks that move slowly, and ones that move in a narrow range, because the option writer always has time working in his favor.
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The slower a stock price moves, the more money he makes. Options with slow-moving underlying stocks will depreciate to zero before the stock ever reaches the bailout point. Unfortunately, the stocks with the highest volatility maintain the highest and fattest premiums for option writing, and so the option writer must attempt to find options with low volatility, and correspondingly high premiums time values when possible. Naked option writing, with its extreme risks, requires diversity. You should maintain at least four different option positions with different underlying stocks.
Remember, one of your overall goals is to stay in the game, and the best way to do that is to avoid betting all your money on one horse. Although the odds are heavily in your favor, losers can put you out of the game if everything you have is bet on that one position. Finally, maintain very small positions in each stock so that a takeover does not nail you with a devastating loss.
The only options you should consider as writing candidates are those with no real intrinsic value, that are not in the money. Use only those options that are out of the money, which only have time extrinsic value. Furthermore, you should select options that are significantly out of the money so that it will take a strong move in the stock—a move that normally would not occur in a two- or three-month time period see secret 7 —to hit your bailout parameters. These out-of-the-money options have a low probability of ever being exercised, or of ever having real value, and this low probability is a strong advantage to the naked options writer.
In other words, choose to sell options that have the highest probability of expiring before the stock price ever gets close to the strike price. Remember that as an option approaches expiration, its rate of depreciation normally increases, especially in the last month.
Selling Puts: % Easy Income Starts With This Options Strategy
Right now, this Selling Puts strategy is crushing the market. You can even copy my own trades.
The cash-secured return on the trade is 3. And if the puts were not cash-secured, the return would be significantly higher. Want to see this in-action? My LIVE webinar is going to reveal at least three real-time trades.