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An investor feels a stock will decrease only slightly and is willing to forgo any depreciation in the stock below the strike price of the written put in exchange for the premium received for writing the lower strike price put. If the call is ever exercised, then you would receive the exercise price of the stock, which is the strike price of the call, as well the premium you received when you sold the call. A Sauder School of Business Graduate specializing in Real Estate Finance with a vivid interest in the stock market and investment strategy. This strategy can work well when a major anticipated decision is about to be made for the stock: buy-back program, law suite, new technology, earnings reports, presidential election. In this case, by using the strategy you have successfully outperformed the stock by using the option. Buy a near-term Put Option: The advantage is Leverage with fewer dollars at risk; however, the option will experience rapid time decay. The risk/reward profile is very similar to the Long Call; thats why this strategy is also referred to as a synthetic call. We decide to buy a $65 Call and a $65 Put on XYZ, $65 being the closest strike price to the current stock price of $63. As long as the stock moves in one direction more than the amount that you paid in option premium you will profit. B) The shares fall - the option expires worthless, you keep the premium, and the option outperform the stock again. It's important to realize that a winning system is one that consistently delivers profit over a longer time frame - and part of the equation is that a percentage of trades will be losers. You buy September 500 Calls for $16 (you have $1000 so you can afford 1 contract (sold in 100 board lots). As we discuss thetwo potential outcomes, lets first assume that we want to holdonto our stock. For stock XYZ, let's imagine the share price is now sitting at $63. You need to find a system that gives you a good overall return, and stick to it. Once you learn to look at the bigger picture, rather than focusing on the individual trades, you'll be a lot more successful in the market. How Do You Choose a Strike Price?Normally, the investor will choose an out of the money option. Other times, you may have to buy your short call back so thatyou will not lose your stock. Going long a straddle is a bet that the underlier will be more volatile over the market prediction. The risk/reward profile is very similar to the Long Call; thats why this strategy is also referred to as a synthetic call. Professional traders use the term lean to refer to onesperception about the directional strength of the stock. The re-initiation of theposition every month is where the term rolling comes from.However, there may be times when you may want to give yourself alittle more upside room for capital appreciation. An option is a derivative trading product that is best used by investors as a hedging tool providing profit protection and profit enhancement. However you also run the risk that the stock will continue to fly upwards and you miss out on that profit. How do you choose the Strike Price?The more bearish the investor is the further out of the money the put should be. The wrong strategy even when applied to the right opportunity can increase risk, decrease profits and even create a potential loss. Long Straddle: This strategy is the opposite of the Short Straddle; an investor will simultaneously buy a call option and a put option on the same stock with the same strike price and same expiration date. These keys will see you finding winner after winner, and making your fortune. Time Spreads (Calendar Spreads): This strategy is implemented by buying and writing an equal number puts or calls on the same stock with different expiration dates but the same strike prices. This selection process, or "investment selection protocols," is a checklist of different types and pieces of data that are favored by the individual investor.
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