You can make a profit if the Calls with a shorter time to expiration erode in value faster than the longer term calls. How to choose the Strike Price?The strike prices used will depend on how bearish an investor is. To be conservative you write put options with a strike price at the money ($120) for $6 each and an expiry in 1 month. Without getting into the trading of spreads, which is aunique strategy in itself and a topic for future OptionsUniversity courses, we will talk a little about the roll. The most basic options strategy is referred to as the covered call.
Now, the most money you can loose over the month is the $1 you paid for the put while you still can participate in any upside so as long as the Starbucks (SBUX) is trading above $26 at expiration you have made a profit. One is to take small losses when they happen, and let your winners run. Other times, you may have to buy your short call back so thatyou will not lose your stock. Say you think Google (GOOG) will decrease in price over the next month. 4) Long Combination (Long Strangle): This strategy is similar to the Long Straddle as it involves buying a put option and a call option on the same stock; however, you use different strike prices.
As an investor, your strategy takes over once you complete this process and choose your investment opportunity. On the other hand, if the price of the stock decreases, then the value of the put increases by one dollar for each dollar drop in the stock price below the strike price. These keys will see you finding winner after winner, and making your fortune. Say you only want to protect your stock from a decline for 1 month. While it is true that the at-the-money option has the mostamount of extrinsic value, it might not always be the idealoption to sell in every situation.
Not bad, butif the stock went to $29.50 then you would have missed out onanother $1.00 profit. 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. Investors use this strategy when they think a large price more will occur in a stock but are unsure of which direction the stock will move.
As long as the stock moves in one direction more than the amount that you paid in option premium you will profit. This price is determined by factors including the stock price, strike price, time remaining until expiration (time value), and volatility. These pieces of data can consist of charts, indicators, oscillators, fundamental analysis, news or even tips.
When an investor is less bearish the strike prices used should be closer to the current market price of the stock and the strike prices should be closer together. As you can see, the buy-write strategy can be altered to fit anydirectional view you have on your selected stock. Instead of shorting Google (GOOG) you decide to buy put options on Google (GOOG) because you dont want to put so much money at risk. In this case, by using the strategy you have successfully outperformed the stock by using the option. The reality, however, is that there are no keys that will find a winner every time.
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 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.
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