options trading tips

oldfairy

Bullish Option Strategies

• Buying Calls
• Selling Puts
• Bull Call Spread
• Bull Put Spread

Neutral Option Strategies

• Selling Covered Calls
• Sell Straddle
• Sell Strangle
• Calendar Spread

Bearish Option Strategies

• Buying Puts
• Selling Calls
• Bear Call Spread
• Bear Put Spread
• Put Hedge

When You Expect a Break-out Move in Low Volatility

• Buy Strangle
• Buy Straddle

oldfairy

Buying Calls Option Strategy
The most basic option strategies involve buying calls or puts, depending on your market view.

When you are very bullish on the market, you can buy calls to profit from an upward movement that occurs while you own the option.

A call is the right, but not the obligation, to purchase an asset at a specific price (the strike price), on or before a specific date (the expiration date).

For example, suppose XXX Corp. is presently trading at $77. per share. If you expect the price to increase significantly over the next couple of months, you could purchase a call option to greatly leverage your profits from the expected movement. At present prices, you could purchase a call with a strike price of $75 and an expiration date a couple months out for about $7.50. If you are correct and XXX trades at $90. during the couple months while you are holding the option, the price of your option will more than double during that time period because the option will be priced at least $15. (anyone holding that option has the right to buy XXX at $75., but they can sell it at the current price of $90., yielding a $15. profit).

Although the underlying asset price increased less than 17%, your option on that asset increased by 100% or more. That's the leverage that options provide.

When you buy a call, your profit potential is unlimited. No matter how high the underlying asset price rises before expiration of your option, you reap the profits from that increase. Yet, your risk is limited. If the underlying asset price drops by $20, the most you can lose is the price that you paid for the option. In the example above, if Microsoft drops to $57, the most you can lose is the price you paid. In this case it would be $7.50 per controlled share.

The person who sold you the option actually holds the underlying asset, so they would absorb the rest of the loss.

When we purchase calls, we generally purchase them at-the- money or in-the-money, because it lowers our risk of losing the premium. Although out-of-the-money options are much cheaper and provide greater leverage, there is a greater risk of loss. We generally buy them several months out to provide enough time for the market to make the anticipated move.

Options are not like stocks where you buy them and hold them. Decay will continually erode your position and a change in trend can evaporate your profits quickly. It is important to set a specific target price for the option when you initiate the position. When we reach our target, we sell and take our profits. Beware that greed can be a strong motivator and make you want to increase your price target as it is rising. However, doing that can sometimes turn a winning position into a losing position.

It is important to analyze your expectations for the underlying asset and for the market before selecting your strategy.

oldfairy

Selling Puts Option Strategy
When you are bullish on the market and feel that it isn't likely to go down in the short term, there is an option strategy that is particularly attractive and is worth your consideration. This strategy involves selling puts on a quality asset that you would like to own at a discount.

With this strategy, you are selling someone the right to sell you the underlying asset at a fixed price (the strike price), on or before the expiration date of the option.

This strategy has several great benefits.

If the asset price is above the exercise price at expiration, the puts will not be exercised and you just pocket the option premium. You can do this over and over again and may never get the asset "put" to you if the asset is above the exercise price at expiration of the option. This generates continuous income for you, increasing your portfolio and generating cash flow for other investments.

If the puts you sold do get exercised, then you are obligated to purchase the asset at the exercise price. But you essentially get it at a discount. You have already agreed that you would like to purchase the quality asset at the exercise price and the price is further discounted by the option premium that you collected.

If the asset does get put to you, you could then also sell covered calls on it to reduce your basis in the asset even further.

Since you are the seller of the put, the time decay of the option works in your favor. The time-value portion of the put premium constantly declines with time, going to zero on the expiration date. The rate of decay is predictable and is easily calculated by options analysis programs such as Option-Aid. As the expiration date approaches, the rate of decay increases. For this reason, it is often better to sell puts with one month or less until expiration. After they expire, you can sell puts on the next month out and collect another premium.

When you make your asset selection, it helps to pick an asset that has started into an uptrend, to increase the premium that you collect when you sell the put and reduce the likelihood of the put being exercised.

It is also important to cover the risks and caveats of this strategy. Your broker will impose a margin requirement on you when you are selling puts, for insurance against a decrease in the price of the underlying asset. So there is some lost opportunity cost here because that money could be working for you elsewhere. If the price of the asset moves downward instead of upward as you anticipated, then the dollar value of the margin requirement will increase, but it will never get higher than the purchase price of the stock if it is put to you.

If you are thinking about purchasing an asset anyway, this strategy can be used to purchase the asset at a discount, or generate income for you as you stand ready to purchase the asset at a discount.

oldfairy

Bull Call Spread Option Strategy
When the market is volatile and you are moderately bullish on it, you can minimize your cash invested in a position, and minimize your risk while still reaping high profit potential by utilizing a Bull Call Spread. This strategy involves buying a call option at one strike price and selling a call on the same asset at a higher strike price. Usually both options will have the same expiration date.

Your cost in establishing this position is less than it would be in just buying a call option, because you are also selling a call at a higher strike price. So you are taking in some money from that sale which reduces your cost outlay and raises your ultimate return-on-investment.

With this strategy, your potential loss is limited to the premium you paid for the calls less commissions and the premium you collected for the calls you sold. Unlike the outright purchase of a call option, your potential profits are limited to the difference between the strike prices multiplied by 100 times the point value of the contract, less the cost of establishing the position. An option calculator such as Option-Aid performs these calculations for you instantaneously.

When we initiate a Bull Call Spread, the call that we purchase is normally at-the-money. We try to allow enough time for the market to make the anticipated move. The call we sell has the same expiration date, with a higher strike price (at a price point that we feel the asset can easily move to within the time period until expiration, yet not too high because it lowers the premium we are collecting to lower our cost basis).

It is important to discuss an additional benefit of doing a Bull Call Spread instead of buying just a call option when the issue you are considering has high volatility. If you purchase a call option on an asset that has high volatility, the asset price could go up, as you expected, yet at the same time, the option price could drop if the implied volatility of the asset declines significantly during that time. So although you were right about the directional movement of the asset, you would have lost money in a straight call option play. A Bull Call Spread could ameliorate that risk, because it is the spread between the call option prices that determines your profit. The call that you sold would also go down in value as volatility declined, but the spread between the call prices would increase as the price of the underlying asset increased. That would give you a profit instead of a loss.

It is also important to cover risks and caveats of this strategy.

The risk of this position is limited and known as described above. Remember that the commission you pay for this position will be higher than the commission for a straight option play, because you are initiating two related option transactions.

When you initiate a Bull Call Spread rather than outright purchase of a call, you are limiting your upside potential. If the asset price rockets skyward, then you aren't able to fully participate in that gain because the higher strike price call that you sold will probably be exercised, limiting your gain.

The major benefits of this strategy occur when volatility is high, making the purchase of calls expensive and increasing the risk of a drop in volatility.

It is important to analyze your expectations for the underlying asset and for the market before selecting your strategy.

oldfairy

Bull Put Spread Option Strategy
When the market is volatile and you are moderately bullish on it, you might consider a Bull Put Spread. This strategy involves selling a put option at one strike price and buying a put on the same asset at a lower strike price (further out-of-the-money). Usually both options will have the same expiration date. This strategy is also referred to as a Bullish Credit Spread.

This strategy has a profit/loss picture that is similar to a Bull Call Spread, however in this case, there is a net premium that goes into your trading account when you establish the position, whereas with the Bull Call Spread, you are paying out a premium when you establish the position. Like the Bull Call Spread, this strategy has limited risk but also limited profits.

This strategy is a bullish strategy, like selling naked puts, that puts premium into your account when you establish the position. However it limits your risk by the purchase of lower priced puts, protecting you if the price drops significantly.

With this strategy, your potential profit is limited to the premium you collected for the puts you sold less commissions and the premium you paid for the puts you bought. Your potential losses are limited to the difference between the strike prices multiplied by 100 times the point value of the contract, less the cost of establishing the position. An option calculator such as Option-Aid performs these calculations for you instantaneously.

When we initiate a Bull Put Spread, the put we buy has the same expiration date, with a lower strike price (at a price point that we feel sufficiently limits our risk, without significantly lowering the premium we are collecting.

It is also important to cover risks and caveats of this strategy.

The risk of this position is limited and known as described above. Remember that the commission you pay for this position will be higher than the commission for a straight option play, because you are initiating two related option transactions.

When you initiate a Bull Put Spread, you are limiting your upside potential. If the asset price rockets skyward, then you aren't able to fully participate in that gain like you would if you had purchased a call.

It is important to analyze your expectations for the underlying asset and for the market before selecting your strategy.

oldfairy

Selling Covered Calls Option Strategy
When you are fairly neutral on the market and you want to generate additional income from your investments, there is an option strategy that is worth your consideration. This strategy involves selling covered calls on assets that you own and are willing to sell at a particular price.

With this strategy, you are selling someone the right to buy an asset that you own at a fixed price (the strike price), on or before the expiration date of the option.

This strategy has some nice benefits.

You receive a premium for selling someone the right to purchase your asset at a particular price that you are willing to sell it for anyway. If the asset price is below the strike price at expiration, then the calls that you sold are not exercised and the premium that you collected provides additional income for you, increasing your rate-of-return or reducing your basis in the asset. If you are writing out-of-the-money calls, the asset may continually increase in value, yet the options may never get exercised, allowing you to do this over and over again. This generates continuous income for you, increasing your portfolio and generating cash flow for other investments.

The downside risk of owning the asset is ameliorated by the option premiums that you collect by selling covered calls, because the premiums reduce your basis in the asset.

If the calls that you sold do get exercised, then you are obligated to sell the asset at the exercise price. But you essentially sell the asset at a premium from the asset price that existed when you sold the covered calls, because you collected the option premium. You have already agreed that you would like to sell the asset at the exercise price and the price is augmented by the option premium that you collected.

Since you are the seller of the option, the time decay of the option works in your favor. The time-value portion of the call premium constantly declines with time, going to zero on the expiration date. The rate of decay is predictable and is easily calculated by options analysis programs such as Option-Aid. As the expiration date approaches, the rate of decay increases. For this reason, it is often better to sell calls with one month or less until expiration. After they expire, you can sell calls on the next month out and collect another premium.

It is also important to cover risks and caveats of this strategy.

If the price of the underlying asset goes below the strike price by more than the option premium that you collected, then you are losing money on paper. But this risk is similar to outright asset ownership and is ameliorated by the option premium that you collected.

When you sell a covered call on an asset that you own, you are limiting your upside potential. If the asset price rockets skyward and stays above the strike price at expiration, then the option will probably be exercised and you will be obligated to sell the asset at the agreed-on strike price. So there is some lost opportunity cost here if the asset turns into a high-flyer.

It is important to analyze your expectations for the underlying asset before writing the covered call. If you have a target price in mind for the asset, you can write an out-ot-the-money covered call approximately at your target price and collect a lower premium but participate in the rise of the asset. If you expect the asset price to remain stable, you can write the call approximately at-the- money and collect a larger premium without much risk. If you expect the asset to decline, but you do not want to sell the asset at that time, the premium you collect from selling a covered call can help offset the price decline. If you sell an in-the-money call, the premium you collect will be even larger, but you run a greater risk of the option being exercised.

If you are thinking about selling an asset anyway, selling a covered call on the asset can be used to sell the asset at a premium, or generate income for you as you stand ready to sell the asset at a premium. However, if you have decided that there is considerable downside risk in an asset and want to eliminate it from your portfolio, then it is probably better to sell it outright.

oldfairy

Sell Straddle Option Strategy
When the market has just made a dramatic move and you are expecting it to consolidate - you might consider selling a straddle. This strategy involves selling a call option and a put option on the same asset at the same strike price and expiration date. This gives you a known, but limited gain, but does expose you to unlimited risk - so you must be careful with this position and be confident of your assumptions. It is not suitable for all investors.

With this strategy, your gain is composed of the premium you received for the call and the put, less the commissions.

When we sell a Straddle, the put and call that we sell are normally on over priced options that are at-the- money or close to it. We consider doing this after a dramatic move in the market, when we are expecting it to consolidate the move and digest its gains before moving again. Because of the dramatic move that was made, volatility is high, making the options we sell very expensive. Then as the market consolidates, volatility decreases and lowers the price of the options, increasing our profits when we buy back the options at a lower price to close our position. Decay also works in our favor with this position.

But be ready to buy back one of the options if there is any indication that the market will resume its trend or reverse direction. If it looks like the market will trend up, buy back the call; if it looks like the market will trend down, buy back the put.

It is also important to cover risks and caveats of this strategy.

The risk of this position is unlimited so you must be very careful. Remember that the commission you pay for this position will be higher because you are initiating two related option transactions.

It is important to analyze your expectations for the underlying asset and for the market before selecting your strategy.

oldfairy

Sell Strangle Option Strategy
When volatility is very high, and the market has just made a dramatic move and you are expecting it to consolidate and take some time to digest its gains, you might consider selling a strangle.

This strategy involves selling an out-of-the-money call option and an out-of-the-money put option on the same asset with the same expiration date. This strategy differs from the Sell Straddle strategy because the options are not at the same strike price. This provides a different profit/loss curve that is worth checking out.

This gives you a known, but limited gain, but does expose you to unlimited risk, so you must be careful with this position and be confident of your assumptions. It is not suitable for all investors.

With this strategy, your gain is composed of the premium you received for the call and the put, less the commissions.

When we sell a Strangle, the put and call that we sell are normally on over-priced options that are out-the- money. We consider doing this after a dramatic move in the market, when we are expecting it to consolidate the move and digest its gains before moving again. Because of the dramatic move that was made, volatility is high, making the options we sell very expensive. Then as the market consolidates, volatility decreases and lowers the price of the options. Decay also works in our favor with this position.

But be ready to buy back one of the options if there is any indication that the market will resume its trend or reverse direction. If it looks like the market will trend up, buy back the call; if it looks like the market will trend down, buy back the put.

It is also important to cover risks and caveats of this strategy.

The risk of this position is unlimited so you must be very careful. Remember that the commission you pay for this position will be higher because you are initiating two related option transactions.

It is important to analyze your expectations for the underlying asset and for the market before selecting your strategy.

oldfairy

Calendar Spread Option Strategy
When you are fairly neutral on the market and you want to generate additional income from your investments, there is an option strategy that is worth your consideration. This strategy involves selling an option with a nearby expiration, against the purchase of an option (with the same strike price) which has an expiration date that is further out.

A Calendar Spread is an option spread where the strike prices are the same, but they have different expiration dates. These spreads are also referred to as horizontal spreads or time spreads.

Calendar spreads can provide a way to add value to your portfolio through your purchase of a long term option with a reduced cost basis, provided by a near term option that you sold.

One very favorable point to a Calendar Spread is the value of time decay. Although both options lose time value as time passes, the option you sold loses value much more quickly than the option you bought. Therefore, if your prediction of a neutral market is correct, the value of your Calendar Spread will increase as time passes. A Calendar Spread takes advantage of time value differentials during neutral markets.

When the near term option expires, you have several alternatives. If you are still predicting a neutral market, you can hold on to your long position, if there is sufficient time left on it, and sell another short term option against that long position. If you are dealing in calls and you fear that the market may go down, you can close out your long position and take the profits. If you are dealing in calls and you predict a more bullish market, you could just hang on to your long position and take a larger profit in the future. In any of the cases, your cost basis on your long position was reduced by the premium you collected from the option you sold.

Another popular way the calendar spread is employed is in the simple rolling out of a position nearing expiry to a later month. If you have sold a covered call and it is about to expire, you may want to roll it out to a later month to collect more premium. This is also done to avoid having the stock called away from you.

It is also important to cover risks and caveats of this strategy. Your loss is limited to the net premium you paid (the money you paid for the option you purchased minus the money you received for the near-term option you sold.

When we implement spreads of this nature, we try to buy long term options that are undervalued. A good option program like Option-Aid, can help you verify that the long term option is undervalued. For the short position, we look for options that are overvalued, since we are selling that position. Option-Aid can also help you verify that your short position is overvalued. This strategy helps to maximize our profits.

There are many different ways to implement a Calendar Spread, depending on your goals and your market outlook.

One popular implementation of the Calendar Spread is try to generate income similar to a Covered Call strategy, but involves buying LEAPS (Long Term Equity Anticipation Securities) instead of the actual stock. So calls are sold against the LEAPS instead of the actual stock. This is done because the LEAPS can be purchased much more cheaply than the actual stock, which can generate much higher returns on invested capital. The risk with this implementation is that the underlying stock goes down in price instead of staying neutral, causing your LEAPS to go down in value. If the underlying stock goes up in price at expiration of the near term option (instead of staying neutral), you could buy back the option you sold and then sell another option, one or more months out.

When you implement this type of spread, you are hoping that the near term option you sold expires worthless. Then you can sell more options a little further out and continue to collect more premium. This either decreases the cost basis of the LEAPS you purchased, or produces recurring income for you.

It is important to analyze your expectations for the underlying asset and for the market before selecting your strategy.

oldfairy

Buying Puts Option Strategy
When you are very bearish on the market, you can buy puts to profit from a downward movement that occurs while you own the option. Additionally, puts can be used to balance risk. If you are somewhat uncertain about the market, but you feel there is a possibility for a strong downturn, you can purchase a mixture of calls and puts to provide balance. Buy puts on overpriced options or options on overpriced assets. Buy calls on underpriced options or options on underpriced assets.

Puts can also be used for hedging purposes. They can provide insurance against a downturn in the assets you carry.

A put is the right, but not the obligation, to sell an asset at a specific price (the strike price), on or before a specific date (the expiration date).

For example, suppose XXX is presently trading at $77. per share. If you expect the price to decrease significantly over the next couple of months, you could purchase a put option to greatly leverage your profits from the expected movement. Suppose that at current prices, you could purchase a put on XXX with a strike price of $80 and an expiration date a couple months out for about $7.00. If you are correct and XXX trades at $65. during the couple months while you are holding the option, the price of your option will more than double during that time period because the option will be priced at least $15. (anyone holding that option has the right to sell XXX at $80., but they can buy it at the current price of $65., yielding a $15. profit).

Although the underlying asset price decreased less than 16%, your put option on that asset increased by 100% or more. That's the leverage that options provide.

When you buy a put, your profit potential is unlimited. No matter how low the underlying asset price falls before expiration of your option, you reap the profits from that decrease. Yet, your risk is limited. If the underlying asset price rises by $20, the most you can lose is the price that you paid for the option. In the example above, if XXX rises to $97, the most you can lose is the price you paid. In this case it would be $7.00 per controlled share.

The person who sold you the option would absorb the rest of the loss.

When we purchase puts, we generally purchase them at-the- money or in-the-money, because it lowers our risk of losing the premium. Although out-of-the-money options are much cheaper and provide greater leverage, there is a greater risk of loss. We generally buy them several months out to provide enough time for the market to make the anticipated move.

Options are not like stocks where you buy them and hold them. Decay will continually erode your position and a change in trend can evaporate your profits quickly. It is important to set a specific target price for the option when you initiate the position. When we reach our target, we sell and take our profits. Beware that greed can be a strong motivator and make you want to increase your price target as it is rising. However, doing that can sometimes turn a winning position into a losing position.

It is important to analyze your expectations for the underlying asset and for the market before selecting your strategy.

oldfairy

Selling Calls Option Strategy
When you are bearish on the market or feel confident that it won't rise in the short term, you might consider selling calls to generate additional income. When you hold the assets for which you are selling the calls, then they are covered calls and there is limited risk. If you do not hold the assets, you are selling naked calls and your risk is unlimited, although your profits are limited. You must be careful when selling naked calls.

With this strategy, you are selling someone the right to buy an asset at a fixed price (the strike price), on or before the expiration date of the option.

This strategy has some nice benefits.

You receive a premium for selling someone the right to purchase an asset at a particular price that you feel it will stay below. If the asset price is below the strike price at expiration, then the calls that you sold are not exercised and the premium that you collected provides additional income for you, increasing your rate-of-return. If you are writing out-of-the-money calls, the asset may continually increase in value, yet the options may never get exercised, allowing you to do this over and over again. This generates continuous income for you, increasing your portfolio and generating cash flow for other investments.

If the calls that you sold do get exercised, then you are obligated to sell the asset at the exercise price. But you essentially sell the asset at a premium from the asset price that existed when you sold the calls, because you collected the option premium. You have already agreed that you would like to sell the asset at the exercise price and the price is augmented by the option premium that you collected.

Since you are the seller of the option, the time decay of the option works in your favor. The time-value portion of the call premium constantly declines with time, going to zero on the expiration date. The rate of decay is predictable and is easily calculated by options analysis programs such as Option-Aid. As the expiration date approaches, the rate of decay increases. For this reason, it is often better to sell calls with one month or less until expiration. After they expire, you can sell calls on the next month out and collect another premium if you still have the same view of the market at that time.

It is also important to cover risks and caveats of this strategy.

If the asset price rockets skyward and stays above the strike price at expiration, then the option will probably be exercised and you will be obligated to sell the asset at the agreed-on strike price or cover the option, incurring a loss. If you sold naked calls, your risk is unlimited.

It is important to analyze your expectations for the underlying asset before selling the call. If you expect the asset price to remain stable, you can write the call approximately at-the-money and collect a larger premium. If you sell an in-the-money call, the premium you collect will be even larger, but you run a greater risk of the option being exercised.

oldfairy

Bear Call Spread Option Strategy
When the market is volatile and you are moderately bearish on it, you might consider a Bear Call Spread. This strategy involves selling a call option at one strike price and buying a call on the same asset at a higher strike price (further out-of-the-money). Usually both options will have the same expiration date. This is also referred to as a Bearish Credit Spread.

This strategy has a profit/loss picture that is similar to a Bear Put Spread, however in this case, there is a net premium that goes into your trading account when you establish the position, whereas with the Bear Put Spread, you are paying out a premium when you establish the position. Like the Bear Put Spread, this strategy has limited risk but also limited profits.

This strategy is a bearish strategy, like selling naked calls, that places premium into your account when you establish the position. However it limits your risk by the purchase of lower priced calls, protecting you if the price goes up significantly.

With this strategy, your potential profit is limited to the premium you collected for the calls you sold less commissions and the premium you paid for the calls you bought. Your potential losses are limited to the difference between the strike prices multiplied by 100 times the point value of the contract, less the cost of establishing the position. An option calculator such as Option-Aid performs these calculations for you instantaneously.

When we initiate a Bear Call Spread, the call we buy has the same expiration date, with a higher strike price (at a price point that we feel sufficiently limits our risk, without significantly lowering the premium we are collecting.

It is also important to cover risks and caveats of this strategy.

The risk of this position is limited and known as described above. Remember that the commission you pay for this position will be higher than the commission for a straight option play, because you are initiating two related option transactions.

oldfairy

Bear Put Spread Option Strategy
When the market is volatile and you are moderately bearish on it, you can minimize your cash invested in a position, and minimize your risk while still reaping high profit potential by utilizing a Bear Put Spread. This strategy involves buying a put option at one strike price and selling a put on the same asset at a lower strike price. Usually both options will have the same expiration date.

Your cost in establishing this position is less than it would be in just buying a put option, because you are also selling a put at a lower strike price. So you are taking in some money from that sale which reduces your cost outlay and raises your ultimate return-on-investment.

With this strategy, your potential loss is limited to the premium you paid for the puts less commissions and the premium you collected for the puts you sold. Unlike the outright purchase of a put option, your potential profits are limited to the difference between the strike prices multiplied by 100 times the point value of the contract, less the cost of establishing the position. An option calculator such as Option-Aid performs these calculations for you instantaneously.

When we initiate a Bear Put Spread, the put that we purchase is normally at-the-money. We generally allow enough time for the market to make the anticipated move. The put we sell has the same expiration date, with a lower strike price (at a price point that we feel the asset can easily move to within the time period until expiration, yet not too low because it lowers the premium we are collecting to reduce our cost basis).

It is important to discuss an additional benefit of doing a Bear Put Spread instead of buying just a put option when the issue you are considering has high volatility. If you purchase a put option on an asset that has high volatility, the asset price could go down, as you expected, yet at the same time, the option price could drop if the implied volatility of the asset declines significantly during that time. So although you were right about the directional movement of the asset, you would have lost money in a straight put option play. A Bear Put Spread could ameliorate that risk, because it is the spread between the put option prices that determines your profit. The put that you sold would also go down in value as volatility declined, but the spread between the put prices would increase as the price of the underlying asset decreased. That would give you a profit instead of a loss.

It is also important to cover risks and caveats of this strategy.

The risk of this position is limited and known as described above. Remember that the commission you pay for this position will be higher than the commission for a straight option play, because you are initiating two related option transactions.

When you initiate a Bear Put Spread rather than outright purchase of a put, you are limiting your upside potential. If the asset price falls like a rock, then you aren't able to fully participate in that movement because the lower strike price put that you sold will probably be exercised, limiting your gain.

The major benefits of this strategy occur when volatility is high, making the purchase of puts expensive and increasing the risk of a drop in volatility.

It is important to analyze your expectations for the underlying asset and for the market before selecting your strategy.

oldfairy

Put Hedge Option Strategy
When you are holding assets that you are reluctant to sell, but you are bearish on the market, you can buy puts as a hedge to help protect yourself against a market decline.

If you are holding a diversified portfolio and you feel it is vulnerable to a market decline, you could buy index puts to protect the whole portfolio. Select an index that best represents your portfolio. If you are holding a particular asset that you feel is vulnerable, you might buy puts on that asset.

If you are correct about the market decline, the losses you incur from the decline in your assets will be offset by the gains made by the increase in value of the puts. When you establish your position, you can make the appropriate calculations to determine the number of puts to purchase to approximately offset your portfolio.

With this strategy, your profits are unlimited (but decreased by the premium you paid for the puts). Your losses are limited because the losses on your assets are offset by the gains in the puts.

When you feel confident in the market again, you can sell your puts if they still have value. If the market is still vulnerable when your puts expire, you will have to decide whether to purchase more puts.

It is important to analyze your expectations for the underlying asset and for the market before selecting your strategy.

oldfairy

Buy Strangle Option Strategy
When volatility is low and you are expecting a large break- out move, but you aren't sure which way it will break out, you might consider buying a strangle.This strategy involves buying an out-of-the-money call option and an out-of-the-money put option on the same asset with the same expiration date and different strike prices. This gives you limited risk and unlimited profit potential with a major move in either direction.

With this strategy, your potential loss is limited to the premium you paid for the call and the put and the commissions.

Technical indications that we look for when we buy a strangle are a tight trading range in a triangle pattern. This is frequently followed by an explosive move near the tip of the triangle, but it is not always apparent ahead of time which direction it will move. Many traders watch for this pattern and jump on the bandwagon when it makes its move. If you are in position with both a put and a call, you will get a quick reward with one of the positions and you can liquidate the other. Then ride the trend, but don't get too greedy. Time decay works against you in this position.

When we buy a Strangle, the put and call that we purchase are out-of-the-money to decrease our investment and risk. We look for the triangle pattern with a tightening trading range, and initiate the position near the tip of the triangle, so that it is in place before the break-out. This is important because the options will be cheaper to buy before the break-out because volatility is low due to the tight trading range pattern. Since you are buying both a put and a call, you want to minimize the cost of the options. When the break-out occurs, volatility will spike up, driving up the price of the options. We generally allow three or more months before expiration, to provide enough time for the market to make its move, but we just stay in long enough to reach our target, because decay is working against us.

It is also important to cover risks and caveats of this strategy.

The risk of this position is limited and known. The cost of this position tends to be higher because you are buying both a put and a call, but by careful positioning as described above, you can minimize this cost. Remember that the commission you pay for this position will be higher because you are initiating two related option transactions. If the asset stays in the tight trading range and doesn't break-out sufficiently during the term of your position, you will lose money. Decay is working against you with this position, but that is ameliorated if you initiate the position close to, but before the break-out, and then quickly liquidate the option on the wrong side of the break-out.

It is important to analyze your expectations for the underlying asset and for the market before selecting your strategy.

oldfairy

Buy Straddle Option Strategy
When volatility is low and you are expecting a large break- out move, but you aren't sure which way it will break out, you might consider buying a straddle.This strategy involves buying a call option and a put option on the same asset at the same strike price and expiration date. This gives you limited risk and unlimited profit potential with a major move in either direction.

With this strategy, your potential loss is limited to the premium you paid for the call and the put and the commissions.

Technical indications that we look for when we buy a straddle are a tight trading range in a triangle pattern. This is frequently followed by an explosive move near the tip of the triangle, but it is not always apparent ahead of time which direction it will move. Many traders watch for this pattern and jump on the bandwagon when it makes its move. If you are in position with both a put and a call, you will get a quick reward with one of the positions and you can liquidate the other. Then ride the trend, but don't get too greedy. Time decay works against you in this position.

When we buy a Straddle, the put and call that we purchase are normally at-the-money or close to it. We look for the triangle pattern with a tightening trading range, and initiate the position near the tip of the triangle, so that it is in place before the break-out. This is important because the options will be cheaper to buy before the break-out because volatility is low due to the tight trading range pattern. Since you are buying both a put and a call, you want to minimize the cost of the options. When the break-out occurs, volatility will spike up, driving up the price of the options. We generally allow three or more months before expiration, to provide enough time for the market to make its move, but we just stay in long enough to reach our target, because decay is working against us.

It is also important to cover risks and caveats of this strategy.

The risk of this position is limited and known. The cost of this position tends to be higher because you are buying both a put and a call, but by careful positioning as described above, you can minimize this cost. Remember that the commission you pay for this position will be higher because you are initiating two related option transactions. If the asset stays in the tight trading range and doesn't break-out sufficiently during the term of your position, you will lose money. Decay is working against you with this position, but that is ameliorated if you initiate the position close to, but before the break-out, and then quickly liquidate the option on the wrong side of the break-out.

It is important to analyze your expectations for the underlying asset and for the market before selecting your strategy.

uddi