| |
| |
|
Investing Information |
|
|
|
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. -=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=- Click Here --> http://www.meta-formula.com/options
MORE RESOURCES:
Investing - Google News |
|
|
|
RELATED ARTICLES
Gold; What Type of Gold to Buy JewelryThe advantages are:? Gold Jewelry is the easiest of the gold to buy and has the enjoyment of being able to be worn.The disadvantages are:? Retail Jewelry is often marked up by 300% or more in the shops. What Age Should I Start Saving For Retirement? Ask this question to 100 people and you will receive 100 very different answers. The fact of the matter is there is no right age to start. Variable Annuities You know all the articles you read about annuities that have extremely high fees? And the ones that people lose a lot of money in? Well, these are better known as variable annuities. yes, they do have some advantages. Investment Rowing You have rowed a boat at some time haven't you? Yes, put the oars in the water and pull. Of course, you don't know where you are going because you are sitting backwards. The Key Ingredient To Increase Preconstruction Profits By Over $20,000 One of the greatest preconstruction investing issues that I hear from individual investors is that they can't get access to what they believe are good projects. Regardless if the preconstruction project is a beach condo, a townhouse, a single family home, or even land investment, individuals are finding that many restrictions are being placed on them by developers. Gold and Silver Maple Leafs Get New Packaging Gold Maple Leafs and Silver Maple Leafs are receiving packaging makeovers, changes clearly mandated by investor disfavor with packaging that the Royal Canadian Mint has used since the coins were introduced. Gold Maple Leafs debuted in 1979, Silver Maple Leafs in 1988. Index Trading Weekly Update Here is a sample of the last newsletter:SP500 Last Signal Comment We just had a new sell signal last friday on june 10th 2005. As expected we faced strong resistance at 1200 and it ended up with a double top as stated in previous issues. Effective Advice For A New Generation of Investors CATCHING A FALLING KNIFEOne of the most common mistakes made by inexperienced investors is trying to "catch a falling knife". This is a habit, common among new investors, of buying stocks that are in "freefall", and it's a bad idea for an investment strategy. Risk and Reward If you are doing your own investing in the stock market, what would be the first question you would ask yourself before you make any trade or investment? If your answer is how fundamentally sound the stock is, or whether the stock just broke out of a trading range on a chart, or the fact that the stock has gone down 50% in the last 6 months, or whether the volatility is low now so it is a good time to buy or sell, then you are probably on the road to ruin. These strategies have nothing in common with each other and there are all kinds of different criteria that I did not mention that have nothing in common with each other. Learn How to Lose and Risk Management One of the leading traders on Chicago Mercantile Exchange, because of a single trade lost everything!For all of his years of experience and money, he had failed to master the most important concept in trading: Risk Management!Each trader seems to have his own unique way of identifying market opportunities. One buys a stock in the hopes of never having to sell it, while another might hold a position in the market for a day or even just a few hours. Going Offshore For Asset Protection There are a number of key reasons why individuals and businesses consider going offshore for asset protection purposes.The asset protection advantages the offshore world offers extend from protecting a business from excessive taxation to opening doors to enable wealth and asset enrichment via the utilisation of offshore investment opportunities. Five Sure Fire Way to Secure Your Financial Future "You can be poor when you're young, but you can't be poor when you're old." That was the tag line used some years ago in a financial services television commercial. Top Ten Investment Mistakes 1. Lacking an investment plan a/k/a/ "Don't take a trip without packing the map". Direcway & Wildblue Set to Square Off this Fall? There is a cat fight brewing between Direcway LLC, Starband and Wildblue Communications for the large number of people in the U.S. Discover the Foundation of Retiring Wealthy - The IRA! Let me tell you about some legal ways to avoid getting taxed on profits from the stock market. You can make a lot of money now with the stock market as low as it is at this time as I teach you in my home study course. Rules for Simplified Employee Pension Plans better known as a SEP Plans A SEP is a special type of IRA. Under a SEP plan the employer creates an IRA account for each eligible employee, hence the name SEP-IRA. 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. Fundamentals of Option Pricing When one begins to consider an option, it is very important to figure out how the premium is calculated. Option premiums depend on a variety of factors including the time left to expiry as well as the price of the underlying security. 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. Part II of Day Traders and Swing Traders and Options? Maybe! Before every protective put trade it is possible to calculate your anticipated maximum loss. Use the formula: (stock price minus strike price) plus option price.
|
| home | site map |
| © 2006 |
