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December 4th, 2013 [Uncategorized] [No Comments »]
[Summary: 10 Most Common Options Strategies]
Option Strategy #1: Covered Call
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Market View: Short Term- Sideways to Moderately Bullish
Net Premium: Credit
Stock Ownership: Yes
Risk: Low
Return: Low (1.5%-3.5% per month)
Resource Requirement: High (need to purchase stock)
Difficulty Level: Basic
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Option Strategy #2: Calendar Spread
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Market View:
Short Term: -Sideways to Slightly Bullish Long Term: -Sideways
Net Premium: Debit
Stock Ownership: No
Risk: High
Return: High (>10% per month)
Resource Requirement: Low
Difficulty Level: Advanced (need to write multiple calls)
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Option Strategy #3: Diagonal Spread
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Market View:
Short Term: -Sideways to Slightly Bullish Long Term: -Bullish
Net Premium: Debit
Stock Ownership: No
Risk: High
Return: High (>10% per month)
Resource Requirement: Low
Difficulty Level: Advanced (need to write multiple calls)
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Option Strategy #4: Bull Call Spread
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Market View: Short Term- Moderately Bullish
Net Premium: Debit
Stock Ownership: No
Risk: High
Return: High (>10% per month)
Resource Requirement: Low
Difficulty Level: Intermediate
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Option Strategy #5: Bull Put Spread
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Market View: Short Term- Moderately Bullish
Net Premium: Credit
Stock Ownership: No
Risk: High
Return: High (>10% per month)
Resource Requirement: Low
Difficulty Level: Intermediate
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Option Strategy #6: Bear Call Spread
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Market View: Short Term- Moderately Bearish
Net Premium: Credit
Stock Ownership: No
Risk: High
Return: High (>10% per month)
Resource Requirement: Low
Difficulty Level: Intermediate
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Option Strategy #7: Bear Put Spread
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Market View: Short Term- Moderately Bearish
Net Premium: Debit
Stock Ownership: No
Risk: High
Return: High (>10% per month)
Resource Requirement: Low
Difficulty Level: Intermediate
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Option Strategy #8: Long Straddle
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Market View: Short Term- Strong Bearish or Strong Bullish
Net Premium: Debit
Stock Ownership: No
Risk: High
Return: High (>10% per month)
Resource Requirement: Low
Difficulty Level: Basic/Intermediate
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Option Strategy #9: Butterfly Put Spread
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Market View: Short Term- Strong Bearish or Strong Bullish
Net Premium: Debit
Stock Ownership: No
Risk: Low
Return: High (>10% per month)
Resource Requirement: Low
Difficulty Level: Intermediate/Advanced (need to monitor multiple legs)
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Option Strategy #10: Iron Condor
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Market View: Short Term- Sideways
Net Premium: Credit
Stock Ownership: No
Risk: High
Return: High (>10% per month)
Resource Requirement: Low
Difficulty Level: Advanced (need to monitor multiple legs)
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All the above strategies and examples are explained in great details in the Why Options Trading? handbook. If you are interested to know more about this handbook:
[CLICK HERE. ]
December 4th, 2013 [Uncategorized] [No Comments »]
[Options Trading Strategy #10: Iron Condor Strategy]
What is it?
An Iron Condor is an advanced options strategy that involves buying and holding 4 different Options of the same underlying stock with different strike prices expiring on the same month. This strategy is mainly used when a trader believes that the stock movement will move sideways in the near term. An Iron Condor is also known as a Vertical Spread strategy.
Market View?
An Iron Condor strategy is used by when you have a:
1. Near Term Neutral view of the stock.
How To Implement It?
Sell one OTM Put Option of a lower strike price than current price of the stock. Buy one OTM Put Option of a much lower strike price than Put Option in 1. Sell one OTM Call Option of a higher strike price than current price of the stock. Buy one OTM Call Option of a much higher strike price than Call Option in 3. –>with all Options expiring in the same month.
Below is a graphical representative of a Butterfly Put Spread Strategyexample:
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FaceBook (FB) stock is currently trading at $51.90 per share on October 23. Based on the current company performance you expect the share price of FB to be trading sideways between $45 and $62.50 until the end of November. As such, you decide to enter into FB position by deploying Iron Condor option strategy. Upon the completion of this transaction, you will receive a credit based on your net premium of the options amounting to $86 for 100 shares (i.e. ($1.60-$1.20) + ($1.36-$0.90) = $0.86 per share). If you projection is correct and FB share price trends within $45 and $62.50 until the end of November, you will keep your premium that you received earlier.
Below is a graphical representative of Profit and Loss or Payoff diagram for the Iron Condor Spread strategy:
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Note: For ease of understanding, the calculations depicted above did not take into account commission charges.
December 4th, 2013 [Uncategorized] [No Comments »]
[Options Trading Strategy #9: Butterfly Put Spread Strategy]
What is it?
A Butterfly Put Spread is an option strategy adopted when an option trader thinks that the price of the underlying asset is going to trade sideways in the short term. This strategy is a low capital and low risk strategy, with the ability to generate high gains if the trend is moving sideways as projected.
Market View?
A Butterfly Put Spread strategy is used by when you have a:
1. Near Term Neutral view of the stock.
How To Implement It?
Buy one ITM Put Option of a higher strike price than current price of the stock. Sell two ATM Put Options of strike price equal the current price of the stock. Buy one OTM Put option of a lower strike price than current price of the stock. –>with all Options expiring in the same month.
Below is a graphical representative of a Butterfly Put Spread Strategyexample:
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After analyzing AP Index. you strongly believe that the index will be trending sideways for the next 2 months. Because of this, you decided to buy one AP Jan 5350 Put Option, one AP Jan 5050 Put Option and you sell two AP Jan 5200 Call Options , all with the expiration date of the following year. To complete this transaction, you decide to pay a 30 point debit (i.e. I index point =$10)., thus the total initial cost for entering into this strategy is $300.This will allow you to have a maximum potential profit of $1200 if the index still remains at 5200 upon expiration.
Below is a graphical representative of Profit and Loss or Payoff diagram for the Butterfly Put Spread strategy:
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Note: For ease of understanding, the calculations depicted above did not take into account commission charges.
December 4th, 2013 [Uncategorized] [No Comments »]
[Options Trading Strategy #8: Long Straddle Strategy]
What is it?
A Long Straddle is an option strategy adopted when an option trader thinks that the price of the underlying asset will experience significant near term volatility. However, the trader does not have sufficient evidence from historical data to predict on the directional movement of the stock, whether upwards or downwards.
Market View?
A Long Straddle strategy is used when you have a:
1. Near Term Strong Bullish or Bearish view of the stock.
How To Implement It?
Buy an ATM Call Option at the strike price near the current price of the stock. AND Buy an ATM Put Option of the same underlying stock price near the current price of the stock with both Options expiring in the same month.
Below is a graphical representative of a Long Straddle Strategy example:
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After analyzing IWM index, you strongly believe that the share price will experience significant short term volatility but you are unsure which directional movement the index is heading to (i.e. either upwards or downwards). You then decide to buy a IWM Feb $112 Call Option @ $3.30 and also a IWM Feb $112 Put Option @ $4.04 with expiration date on Feb 21, the following year. To complete the transaction, you will to pay a net premium of the options spread of $734 for 100 shares (i.e. $3.30 + $4.04 = $7.34 per share).
Below is a graphical representative of Profit and Loss or Payoff diagram for the Long Straddle strategy:
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Note: For ease of understanding, the calculations depicted above did not take into account commission charges.
December 4th, 2013 [Uncategorized] [No Comments »]
[Options Trading Strategy #7: Bear Put Spread]
What is it?
A Bear Put Spreadstrategy is similar to Bear Call Spread except the net premium for Bull Put Spread is a debit instead of a credit (i.e. you will be paying premium instead of receiving a premium). Instead of buying Call Options, you will buy Put Options.
Market View?
A Bear Put Spread strategy is used by when you have a:
1. Near Term Moderately Bearish view of the stock.
How To Implement It?
Buy an OTM Put Option at the strike price higher than the current price of the stock. AND Sell an ITM Put Option of the same underlying stock at a lower strike price than the current stock with both Options expiring in the same month.
Below is a graphical representative of a Bear Put Spread example:
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After analyzing SPA stock, you strongly believe that the share price will be retracing in the sin the next few months. Based on this analysis, you then decide enter in the trade by buying a SPY Jan $185 Put Option @ $10.40 and selling SPY Jan $170 Put Option @ $2.29 with expiration date of Jan 17 the following year. Upon transaction, you will to pay a net premium of the options spread of $811 (i.e. $10.40 – $2.29 = $8.11 per share).
Below is a graphical representative of Profit and Loss or Payoff diagram for the Bear Put Spread strategy:
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Note: For ease of understanding, the calculations depicted above did not take into account commission charges
December 4th, 2013 [Uncategorized] [No Comments »]
[Options Trading Strategy #6: Bear Call Spread]
What is it?
A Bear Call Spread is a spread strategy used when the option trader thinks that the price of the underlying asset is going to retrace downwards in the short term.
Market View?
A Bear Call Spread strategy is used by when you have a:
1. Near Term Moderately Bearish view of the stock.
How To Implement It?
Buy an OTM Call Option at the strike price higher than the current price of the stock. Sell an ITM Call Option of the same underlying stock at a lower strike price than the current stock with both Options expiring in the same month.
Below is a graphical representative of a Bear Call Spread example:
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Based on your analysis of the SPY stock, you strongly believe that the share price will be retracing in the next 3 months. Because of this you decide to buy a SPY Jan $185 Call Option @ $0.71 and sell SPY Jan $170 Call Option @ $8.10 with expiration date set on Jan 17 the following year. By completing the transaction above, you will receive a credit based on your net premium of $739 (i.e. $8.01-$0.71 = $7.39 per share). Upon expiration on the following year, your investment decision was spot on. As such, you will keep the premium of $739 that you have received earlier.
Below is a graphical representative of Profit and Loss or Payoff diagram for the Bear Call Spread strategy:
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Note: For ease of understanding, the calculations depicted above did not take into account commission charges.
December 4th, 2013 [Uncategorized] [No Comments »]
[Options Trading Strategy #5: Bull Put Spread]
What is it?
A Bull Put Spread strategy is similar to Bull Call Spread except the net premium for Bull Put Spread is a credit instead of a debit (i.e. you will be receiving premium instead of paying for a premium). Instead of buying Call Options, you will buy Put Options.
Market View?
A Bull Put Spread strategy is used by when you have a:
1. Near Term Moderately Bullish view on the stock.
How To Implement It?
Buy an ITM Put Option at the strike price lower than the current price of the stock. AND Sell an OTM Put Option of the same underlying stock higher strike price than the current stock with both Options expiring in the same month.
Below is a graphical representative of a Bull Put Spread example:
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After analyzing WOW stock, you strongly believe that the share price will rally upwards in the by end of next month. Because of this, you decide to buy 6 WOW Nov $34.50 Put Options @ $1.00 and you sell 6 WOW Nov $36.00 Call Options @ $1.75 with Nov 28, 2013 expiration date. By entering this strategy, you will receive premium of $450 (i.e. ($1.75-$1.00) x 6 contracts x 100 shares). Upon the expiry date on end of November, the share price rallies to $37. This will result in you keeping the premium you received when you enter into these positions.
Below is a graphical representative of Profit and Loss or Payoff diagram for the Bull Put Spread strategy:
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Note: For ease of understanding, the calculations depicted above did not take into account commission charges.
December 4th, 2013 [Uncategorized] [No Comments »]
[Options Trading Strategy #4: Bull Call Spread]
What is it?
A Bull Call Spread is a spread strategy used when the option trader thinks that the price of the underlying asset will go up moderately in the short term.
Market View?
A Diagonal Spread strategy is used by when you have a:
1. Near Term Moderately Bullish view on the stock
How To Implement It?
Buy an ITM Call Option at the strike price lower than the current price of the stock. Sell an OTM Call Option of the same underlying stock higher strike price than the current stock with both Options expiring in the same month.
Below is a graphical representative of a Bull Call Spread example:
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After completing your technical analysis on CAT stock at the beginning November 6, you anticipate that the stock price is going to move upwards by end of February next year. You then decide to buy a CAT Feb $75.00 Call Option @ $9.90 and sell a CAT Feb $87.50 Call Option @ $1.89 with expiration date of February on the following year. To complete this transaction, you have to pay a premium of $801 for 100 shares of CAT (i.e. $9.90-$1,89 = 8.01 per share). Upon the expiry date on end of February the following year, the share price rallies to $89. This will result in you receiving a maximum profit of $449 for 100 shares (i.e. ($87.5-$64.00)-$8.01=$4.49 per share)
Below is a graphical representative of Profit and Loss or Payoff diagram for the Bull Call Spread strategy:
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Note: For ease of understanding, the calculations depicted above did not take into account commission charges.
December 4th, 2013 [Uncategorized] [No Comments »]
[Options Trading Strategy #3: Diagonal Spread]
What is it?
A Diagonal Spread strategy is very similar to the Calendar Spread. The strategy is adopted by simultaneously entering into a buy and sell position in two options of the same underlying stock but with different strike prices and different expiration dates.
The main difference between the Calendar spread and the Diagonal Bull Spread lies in the long term outlook. The employer of the Diagonal Bull Spread has a long term market view term that is slightly more bullish.
Market View?
A Diagonal Spread strategy is used by when you have a:
1. Long Term Bullish * view on the stock , AND
2. Short Term Sideways or Mildly Bullish Ɨ view of the stock
*Note: Short term is ideally defined as 4-6 week time period
Long term is defined as > 2months month time period
How To Implement It?
Since a Diagonal Spread strategy does not require you to own a stock, you only need to do two things in order to execute this strategy:
Buy ITM call option with a lower strike price A, approximately 60 days from expiration – a.k.a . “back-month”) AND Sell OTM call, with a higher strike price B, approximately 30 days from expiration – a.k.a . “front-month”) At expiration of the front-month call, sell another Call Option with strike B and the same expiration as the back-month call.
Below is a graphical representative of a Diagonal Spread example:
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In late October, OSH is trading at $8.50 after a modest pullback. You feel that OSH will likely be moving up sometime during the next six weeks. You sell one Nov28 $8.75 OTM Call Option for $0.08 and buy one Dec 19 $8.00 ITM Call Option for $0.66. The initial cost to enter this position is $58 for 100 shares (i.e. 0.66$-$0.08= $0.58 per share). The ideal situation for the Diagonal Bull Call Spread buyer is when the underlying stock price remains unchanged and only goes up and beyond the strike price of the sold Call Option when the long term Call Option expires. In this scenario, as soon as the front month call expires worthless, you need to sell another Call Option for the back month to reduce the cost of the trade.
Below is a graphical representative of Profit and Loss or Payoff diagram for the Diagonal Spread strategy:
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Note:
1) Similar to Calendar Spread, since this strategy involves two expiry months, it is not possible to construct an accurate payoff diagram since the time value(s) of back month Call Option at expiry are unknown.
2) For ease of understanding, the calculations depicted above did not take into account commission charges.
December 4th, 2013 [Uncategorized] [No Comments »]
[Options Trading Strategy #2: Calendar Spread]
What is it?
A Calendar Spread strategy is also known as a Time spread or a Horizontal Spread or a Replacement Covered Call because this strategy involves buying and selling options with different expiration months.
The only difference from Covered Call, is that you do not own the underlying stock, but you do own the right to purchase it from the longer dated (Buy) Call Option. So if you are in a situation where you have less capital but you need leverage, Calendar Spread is the answer.
Market View?
A Calendar Spread strategy is used by when you have a:
1. Long Term * : Neutralview of the stock.
2. Short Term * : Sideways or Mildly Bullish view of the stock
*Note:
-Short term is ideally defined as 4-6 week time period
-Long term is defined as > 2months month time period
How To Implement It?
Since A Calendar Spread does not require you to own a stock, you only need to do two things in order to execute this strategy:
Buy one long-Term ATM Call Option AND Sell a short term ATM or OTM Call Option
Below is a graphical representative of a Calendar Spread example:
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In the above example, stock XYZ is currently trading at $10.00 in June 26. As an options trader, you believe that the share price will trend sideways until next month. Thus you decide to buy a Sep 28 $10.00 Call Option at $6.50 and sell an OTM Jul 31 $12.50 Call Options at $2.50. Thus, the initial cost to enter this position is $400 for 100 shares (i.e. $6.50-$2.50= $4 per share) Let say, one month later (i.e. end of July), XYZ is now trading at $12.00, thus the Jul 31 $12.50 Call Option expires worthless (i.e. $0.00). However, since the share price has risen by $2.00 since last June 26, the Sep $10.00 Call Option has risen in its intrinsic value by $0.75 and now worth $7.25. Thus, at this point, you are still at a loss this of $325 (i.e. $400- ($0.75X100). In order to gain a profit, you would need to sell Call options in Aug & Sep since your bought call Option has an expiry date of Sep 28.
Below is a graphical representative of Profit and Loss or Payoff diagram for the Calendar Spread strategy:
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Note:
1) Since this strategy involves two expiry months, it is not possible to construct an accurate payoff diagram since the time value(s) of the later months Call Options at expiry are unknown.
2) For ease of understanding, the calculations depicted above did not take into account commission charges.
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[Summary: 10 Most Common Options Strategies] [Options Trading Strategy #10: Iron Condor Strategy] [Options Trading Strategy #9: Butterfly Put Spread Strategy] [Options Trading Strategy #8: Long Straddle Strategy] [Options Trading Strategy #7: Bear Put Spread]
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