| |
| |
|
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
Asset Location - Increase Investing Returns & Reduce Your Taxes Location - Once the holy grail only for real estate investors is fast becoming the mantra for every stock, bond, and mutual fund investor. Experts and studies now recognize managing asset location is second only to asset allocation in determining the success of your investment returns. Bad News - Why The Financial News Media Can Cost You Money! The communication innovations we have around us today like the internet, financial newspapers, and special interest television channels focused on investing like CNBC are a high speed pipeline of nonsensical chatter. All these sources of information mean that there is no shortage of media people trying to answer our questions about the stock market and specific stocks. Planning Starts with the Basics When developing a plan for your finances, the toughest question often is: "Where do I begin?" Before investing in stocks and bonds or buying life insurance, before implementing any change or making any decisions, you first need to analyze and understand your entire financial picture. Two documents allow you to do just that. Annuity Owner Mistakes Okay, so I can tell you I have sat in front of countless numbers of people who have made mistakes when purchasing and owning annuities. And I have visited people who wish they never got involved in an annuity. Trading Expert Discovers Ways To Beat Stock Market Odds With Money Management The first point to mastering money management is that you have to understand when you're trading on the stock market is that you are playing the odds - but unlike many forms of gambling, you can make money. The key to making this money is to respect the risk that is part of the market, and manage it. Investing In or Owning Drug Lab Properties Clean Up (includes the insides and the outside of a building)Air out the buildingRemoval of contaminated materials: Carpets, carpet pads, Linoleum, drapes and blinds, air-filters, refrigerators, range, water heater, all tenant clothing and their furniture.Removal needs to be to a site that accepts contaminated product. Retire Dollar Smart Jim Miller is a registered investment advisor. This means that he is not beholden to a particular brokerage or financial institution. Investing: Do You Want To Make Money, Or Would You Rather Fool Around? It always amazes me how much stock market investors resemble horse track bettors. Some are very conservative, willing to trade low returns for relative safety. Investing Psychology Today Requires All Traders to Awaken Their Speculator Minds Stock trading strategies are as rampant today, as they were during the Great Bull Market. Yet, can you truly master the stock market like so many investing books propose?Consider this: When you can't even trust the financial reports of analysts, and the company bean counters that feed them with data, how can you? What's needed are robust, stock trading strategies; the type that enables you to think above the crowd, but not apart from them! The kind of strategies in touch with your speculator mind response!Witness the Enron fiasco. Stocks: Reduce Risk Yet Maximize Profits It is important to note that every smart investor wants to minimize risk while maximizing profit potential. Yet conventional investment theory tells us that in order to increase returns, you have to increase risk. Mutual Fund Returns May Not Be As They Seem! Arthur Levitt, during his tenure at the SEC, experienced many cases where the non-indexed mutual fund manager bought shares for their own accounts before the fund bought the shares. The fund's purchases drove up the price of the stocks and the fund manager's made a killing on the deal. Global Markets: A Window on the World Economy Expectations drive the market. Every stock price is driven by what people expect the company to do. Your Portfolio and "Old Ironsides" The USS Constitution first ventured into the waters in 1798. From there she became an icon of durability and success. Getting Started In Investing Are you ready to open your pathway to financial independence?Well you should be. The sooner the better. 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. The Economy Is Not The Stock Market Several days ago, the Commerce Department reported that May's factory orders had increased by a 2.9 percent. Chile Leads the Latin Pack Everyone's talking about China. Don't miss the opportunities in the other CHI. How to Buy to Let Find out everything you need to know about buy to let. Learn what to buy, where to buy and what not to buy. Forex market offers opportunity and information The forex market is what is called an international exchange currency market, where currencies are exchanged on a daily basis. There are five forex market centers around the world - New York, London, Tokyo, Frankfurt and Zurich. Larry, Moe and Curley, Investment Brokers Larry, Moe and Curley were sitting in their favorite restaurant just off Wall Street having their usual 3 martini lunch and were discussing the day's events and their client portfolios.Larry:"I had 12 calls this morning from customers wanting to know why the market was going down".
|
| home | site map |
| © 2006 |