Options trading strategies

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Options trading strategiesHow to Trade Options

Apr 12, 2012, 2:23 pm EST | By Beth Gaston Moon. InvestorPlace Contributor

Options Trading Strategies: Buying Call Options

Buying a call option —or making a “long call” trade— is a simple and straightforward strategy for taking advantage of an upside move or trend. It is also probably the most basic and most popular of all option strategies. Once you purchase a call option (also called “establishing a long position”), you can:

A call option gives you the right, but not the obligation, to buy the stock (or “call” it away from its owner) at the options strike price for a set period of time (until your options will expire and are no longer valid).

Typically, the main reason for buying a call option is because you believe the underlying stock will appreciate before expiration to more than the strike price plus the premium you paid for the option. The goal is to be able to turn around and sell the call at a higher price than what you paid for it.

The maximum amount you can lose with a long call is the initial cost of the trade (the premium paid), plus commissions, but the upside potential is unlimited. However, because options are a wasting asset, time will work against you. So be sure to give yourself enough time to be right.

Options Trading Strategies: Buying Put Options

Investors occasionally want to capture profits on the down side, and buying put options is a great way to do so. This strategy allows you to capture profits from a down move the same way you capture money on calls from an up move. Many people also use this strategy for hedges on stocks they already own if they expect some short-term downside in the shares.

When you purchase a put option, it gives you the right (but, not the obligation) to sell (or “put” to someone else) a stock at the specified price for a set time period (when your options will expire and no longer be valid).

For many traders, buying puts on stocks they believe are headed lower can carry less risk than shorting the stock and can also provide greater liquidity and leverage. Many stocks that are expected to decline are heavily shorted. Because of this, its difficult to borrow the shares (especially on a short-them basis).

On the other hand, buying a put is generally easier and doesnt require you to borrow anything. If the stock moves against you and heads higher, your loss is limited to the premium paid if you buy a put. If youre short the stock, your loss is potentially unlimited as the stock rallies. Gains for a put option are theoretically unlimited down to the zero mark if the underlying stock loses ground.

Options Trading Strategies: Covered Calls

Covered calls are often one of the first option strategies an investor will try when first getting started with options. Typically, investor will already own shares of the underlying stock and will sell an out-of-the-money call to collect premium. The investor collects a premium for selling the call and is protected (or “covered”) in case the option is called away because the shares are available to be delivered if needed, without an additional cash outlay.

One main reason investors employ this strategy is to generate additional income on the position with the hope that the option expires worthless (i. e. does not become in-the-money by expiration). In this scenario, the investor keeps both the credit collected and the shares of the underlying. Another reason is to “lock in” some existing gains

The maximum potential gain for a covered call is the difference between the purchased stock price and the call strike price plus any credit collected for selling the call. The best-case scenario for a covered call is for the stock to finish right at the sold call strike. The maximum loss, should the stock experience a plunge all the way to zero, is the purchase price of the strike minus the call premium collected. Of course, if an investor saw his stock spiraling toward zero, he would probably opt to close the position long before this time.

Options Trading Strategies: Cash-Secured Puts

A cash-secured put strategy consists of a sold put option, typically one that is out-of-the-money (that is, the strike price is below the current stock price). The “cash-secured” part is a safety net for the investor and his broker, as enough cash is kept on hand to buy the shares in case of assignment.

Investors will often sell puts and secure them with cash when they have a moderately bullish outlook on a stock. Rather than buy the stock outright, they sell the put and collect a small premium while “waiting” for that stock to decline to a more palatable buy-in point.

If we exclude the possibility of acquiring the stock, the maximum profit is the premium collected for selling the put. The maximum loss is unlimited down to zero (which is why many brokers make you earmark cash for the purpose of buying the stock if its “put” to you). Breakeven for a short put strategy is the strike price of the sold put less the premium paid.

Options Trading Strategies: Credit Spreads

Option spreads are another way relatively novice options traders can begin to explore this new family of derivatives. The most basic credit and debit spreads combine two puts or calls to yield a net credit (or debit) and create a strategy that offers both limited reward and limited risk. There are four types of basic spreads: credit spreads (bear call spreads and bull put spreads) and debit spreads (bull call spreads and bear put spreads). As their names imply, credit spreads are opened when the trader sells a spread and collects a credit; debit spreads are created when an investor buys a spread, paying a debit to do so.

In all of the types of spreads below, the options purchased/sold are on the same underlying security and in the same expiration month.

Bear Call Spreads

A bear call spread consists of one sold call and a further-from-the-money call that is purchased. Because the sold call is more expensive than the purchased, the trader collects an initial premium when the trade is executed and then hopes to keep some (if not all) of this credit when the options expire. A bear call spread may also be referred to as a short call spread or a vertical call credit spread.

The risk/reward profile of the strategy can vary depending on the “moneyness” of the options selected (whether they are already out-of-the-money when the trade is executed or in-the-money, requiring a sharper downside move in the underlying). Out-of-the-money options will naturally be cheaper, and therefore the initial credit collected will be smaller. Traders accept this smaller premium in exchange for lower risk, as out-of-the-money options are more likely to expire worthless.

Maximum loss, should the underlying stock be trading above the long call strike, is the difference in strike prices less the premium paid. For example, if a trader sells a $32.50 call and buys a $35 call, collecting a credit of 90 cents, the maximum loss on a move above $35 is $1.60. The maximum potential profit is limited to the credit collected if the stock is trading below the short call strike at expiration. Breakeven is the strike of the purchased put plus the net credit collected (in the above example, $35.90).

Bull Put Spreads

These are a moderately bullish to neutral strategy for which the seller collects premium, a credit, when opening the trade. Typically speaking, and depending on whether the spread traded is in-, at-, or out-of-the-money, a bull put spread seller wants the stock to hold its current level (or advance modestly). Because a credit is collected at the time of the trades inception, the ideal scenario is for both puts to expire worthless. For this to happen, the stock must be trading above the higher strike price at expiration.

Unlike a more aggressive bullish play (such as a long call), gains are limited to the credit collected. But risk is also capped at a set amount, no matter what happens to the underlying stock. Maximum loss is just the difference in strike prices less the initial credit. Breakeven is the higher strike price less this credit.

While traders are not going to collect 300% returns through credit spreads, they can be one way for traders to steadily collect modest credits. This is especially true when volatility levels are high and options can be sold for a reasonable premium.

Options Trading Strategies: Debit Spreads

Bull Call Spreads

The bull call spread is a moderately bullish strategy for investors projecting modest upside (or at least no downside) in the underlying stock. ETF or index. The two-legged vertical spread combines the same number of long (purchased) closer-to-the-money calls and short (sold) farther-from-the-money calls. The investor pays a debit to open this type of spread.

The strategy is more conservative than a straight long call purchase, as the sold higher-strike call helps offset both the cost and the risk of the purchased lower-strike call.

A bull call spreads maximum risk is simply the debit paid at the time of the trade (plus commissions). The maximum loss is endured if the shares are trading below the long call strike, at which point, both options expire worthless. Maximum potential profit for a bull call spread is the difference between strike prices less the debit paid. Breakeven is the long strike plus the debit paid. Above this level, the spread begins to earn money.

Bear Put Spreads

Investors employ this options strategy by buying one put and simultaneously selling another lower-strike put, paying a debit for the transaction. An investor might use this strategy if he expects moderate downside in the underlying stock but wants to offset the cost of a long put.

Maximum loss — suffered if the underlying stock is trading above the long put strike at expiration — is limited to the debit paid. The maximum potential profit is capped at the difference between the sold and purchased strike prices less this premium (and is achieved if the underlying is trading south of the short put). Breakeven is the strike of the purchased put minus the net debit paid.

Okay, now youve learned the basics and may be itching to try your hand at virtual options trading. Its time to select a broker if you dont already have one.

Article printed from InvestorPlace Media, investorplace/2012/04/options-trading-strategies/.

Options Trading Strategies

Over the past few years Options Trading Strategies have gained a lot of popularity. These are highly diversified strategies, which when used correctly, can give you some awesome results.

Despite of this, there are many investors who shy away from Options. They need to remember and bear this in mind:

Anything used wisely and correctly can get you the desired results. And so do Options

When you use Options trading strategies wisely, they will protect, grow and diversify your position. If you are looking for Risk Management and Position trading, then Options are the right tool you are looking for. The key here lies in finding the right strategy for your advantage.

So let’s try to understand what Options are and what are its unique strategies available to investors.

What are Options?

There are several Options Trading Strategies available, but you need to first understand what options are: Option specifically gives you the right to buy or sell an asset at a certain price and a certain date.

Understanding what exactly this means can be a bit intimidating at first. So let’s take a small example to understand what options are:

Example: Buying a Guitar Analogy for Buying an Option.

Lets say you want to buy a guitar from your friend. And your friend wants $1500 for it.

If you dont have the money to buy it right now, you can tell your friend that you will pay you $500 right now if he holds the guitar for you for a month.

But if you dont come up with $1500 by then, your friend can keep the $500 and can do whatever he wants with the guitar.

In this case, the guitar is the asset, and your right to buy it under those specific terms is an option.

But if your friend realizes that the guitar is worth $5,000, he will still have to sell it to you for $1500 because you have that right, and thus youll make a profit.

If the guitar breaks, you probably wont want to spend $1500 entirely to buy it, but youll lose the $500 you used to buy that option.

This is pretty much how an options trading works, but it’s very complicated and risky in practice.

So moving forward, let’s learn a few Options Trading Strategies. Strategies that we will be discussing are:

#1: Long Call Strategy

#2: Short Call Strategy

#3: Long Put Strategy

#4: Short Put Strategy

#5: Long Straddle Strategy

#6: Short Straddle Strategy

# 1: Long Call Strategy

This is one of the option trading strategies for aggressive investors who are very bullish about a stock or an index.

Buying calls can be an excellent way to capture the upside potential with limited downside risk.

It is the most basic ofall options trading strategies. It is comparatively an easy strategy to understand.

When you buy it means you are bullish on a stock or an index and you expect to rise in future.

Options Trading Strategies

For the first time ever, Bottarelli Research is making the trading tactics used by 7-digit CBOE floor traders available to you. Never before has anything like this been revealed to the investing public. In fact, nowhere else in the world can you learn these secret tactics — and use them in real time — than with Bottarelli Research Options.

Even if youve tried hundreds of other trading systems, youve never seen anything quite like this. When you apply these secrets to your trading, youll see an immediate impact on your profits.

We call these secrets “Automatic Money Principles: 5 Secret CBOE Tactics for 7-Digit Returns.” Here is a brief taste of what these secrets can offer you…

The “Who Cares” Stock Automatic Money Principle #1

A “Who Cares” stock is what I call a company you need to buy despite its seemingly overblown fundamentals.

Without revealing the secret of a “Who Cares” stock, youre buying a stock with momentum on its side. And if theres one golden rule of trading, its never get in the way of a momentum stock.

Its a proven fact…momentum stocks will move higher despite valuation ratios like P/E and Price to Book that appear totally absurd. Its called a “Who Cares” stock because its a “buy” despite all these crazy valuation ratios.

How can you possibly make money buying stocks like this?

Value investors constantly bet against momentum stocks. You see, whenever value investors get wind of a stock trading at some absurd P/E multiple, they expect a sudden down-turn in share prices, so they short the stock.

Normally, this tactic makes money.

But when youre dealing with a momentum stock, this large short position actually creates the exact opposite effect.

Remember, were dealing with a momentum stock. So if the stock goes up $2.00 or $3.00, the large portion of shorts get spooked and cover themselves…creating a short-covering effect that leads to an even larger up-move!

What you have is a stock that seemed over-valued at $70 a share now trading for $100…even $150 a share. And youve profited off this entire up-move!

A perfect example occurred with Salesforce CRM NYSE .

With a P/E multiple of 232, its easy to understand why CRMs valuation is so ridiculous.

But on August 18, we entered the CRM September 100 Calls O:CRM 10I100.00 for $4.80 per contract.

We knew that on August 20, CRM was scheduled to report earnings and according to our research, their report was going to be a blockbuster.

Now, get this…

The chart below shows you the candlestick formation that occurred on August 19, just one day before CRM was scheduled to report earnings.

As you can see, CRM was moving lower…

Most traders got spooked and ran for cover. But not us.

On the CBOE trading floor, Ive seen this trick before. Its called a “Market Maker Shakeout.”

Floor traders are simply shaking the tree, which forces weak-bellied investors to sell their shares just before a big earnings pop.

I explained this situation to my subscribers — and we held our calls.

What happened?

The very next day, CRM reported fantastic earnings, and the stock absolutely exploded to the upside.

The chart tells the whole story…

Bottarelli Research members sold the calls for $8.00 per contract, and pocketed a 67% gain.

The secret is that individual investors are not able to make these types of trades, simply because theyre brainwashed with the “old-school” mentality of valuation. But in the world of successful trading, a “Who Cares” stock that seems overvalued at $125 will most likely run up to $140…even $200.

The “Indisputable Evidence” Play Automatic Money Principle #2

The “Indisputable Evidence” play is probably the single most important indicator used by floor traders. Its so important because it cannot be disputed.

In other words, when you see this indicator hit, you know — 100 times out of 100 — that a stocks next move will be higher (or lower — it works both ways).

Without revealing the secret of an “Indisputable Evidence” play, the premise is buying calls or puts on stocks that indicate they will be moving higher or lower over the next 2-3 weeks (but often times even shorter).

Thats why I call it an “Indisputable Evidence” play. When you see a stock trade in this pattern, you know — without looking at anything else — the stocks bullish or bearish.

It sounds simple, but this one indicator is totally ignored by the general investing public. Nobody off the CBOE floor realizes the significance of the indicator used in the “Indisputable Evidence” play — and this oversight loses individual traders literally tens of millions in trading profits.

This principle was executed to perfection on a company called Coinstar CSTR NASDAQ .

On October 28, 2010, Coinstar displayed the qualities of the “Indisputable Evidence” play when it traded for $65.00 a share. The moment this happened, I knew the stock was going higher…much higher.

So, I recommended the CSTR November 45 Calls O:CSTR 10K45.00 for $2.95.

The very next day, Coinstar blasted higher exactly as we predicted. We sold our calls for $12.20, good for a 314% return.

Just look at the chart below…

Never once have I seen a stock trade against this signal. Thats why floor traders lean on it so heavily. Dave and Cabot used this secret over…and over…and over again. And they made incredible amounts of money.

The “Always Bullish” Guarantee Automatic Money Principle #3

The “Always Bullish” guarantee is the strongest indicator of a bullish stock youll ever see. Like a last-second three-point shot at the buzzer, this trade has been described as “nothing but net”. This secret allows floor traders to own $50, $75, even $100 stocks with a cost basis of $5 or less.

In fact, Mad Money host Jim Cramer used this technique to make $35,000 in ten minutes …and he learned it from studying CBOE floor traders.

[It] always works in a bull market. [It] creates wealth. Instant wealth. In the time it takes a Harvard professor to brainwash a class, I took a gain of more than $35,000 in ten minutes.

[Its] a powerful methodology for consistent winning in the stock market…An excellent method to build wealth.


Without giving away the secret, there are two actions made in the boardrooms of publicly-traded companies that tell you, without any doubt, that a stock will move higher. Thats why its called the “Always Bullish” guarantee. The only reason for making these two critical decisions is to help facilitate their stock for its next up-move.

The mainstream media — along with individual investors — typically learn about these actions weeks or months after the fact. By then its too late. As a charter member to Bottarelli Research Options, youll learn about these opportunities the instant they happen.

There are many examples of this strategy, but the best illustration comes from an older trade we made on biotech firm Genentech DNA NYSE .

Take a look at this chart…

The moment the “Always Bullish” guarantee happened (marked “buy” above), I bought DNA January 75 Calls. A few months later, I sold these calls for a 131% gain.

The Downside “Gift Gap” Automatic Money Principle #4

The downside “Gift Gap” doesnt happen too often, but when it does, its practically money in the bank.

The secret is the oldest floor saying in the book, “the trend is your friend.”

The theory goes like this…

No stock goes straight up. Not even the most bullish stock on Wall Street moves up on a straight 45-degree angle. There will be bumps in the road, in terms of profit-taking…one-day sell-offs…or earnings disappointments. The trick is to find a large-cap or mid-cap stock in a bona-fide uptrend…and buy it anytime a one-day moves pushes the stock down 5% or more.

Traders consider this down-move in a bullish stock a “gift,” and they know how to cash in big time.

A perfect example happened with shares of cloud-computing leader F5 Networks FFIV NASDAQ .

In early January 2011, shares of FFIV got punished, dropping $35.00 in one day because the company slightly missed their earnings.

Most traders panicked and dumped their holdings in FFIV.

Rather than selling out, I recommended buying a series of FFIV call positions — all as momentum started coming back into FFIV.

Watch what happened next…

On February 4, 2011, we entered the FFIV February 125 Calls O:FFIV 11B125.00 for $2.20.

An hour after entering the calls, FFIV shot higher. Thats when we sold these calls for $2.85, making a quick 30% return — in 1 hour.

But according to the FFIV chart, this was a stock that was going to keep moving higher.

So, on the next intra-day dip (less than an hour later), we moved back into FFIV February 125 Calls O:FFIV 11B125.00 for $3.50.

And once again, within hours, FFIV bounced even higher.

On this move, we sold our calls for $4.60, locking in another 31% return a few hours after our previous gain.

But once again, we were still not done with FFIV…

As the afternoon doldrums set in, FFIV got soft and pulled back yet again.

So, we jumped back into calls yet again. Only this time, we entered the FFIV February 120 Calls O:FFIV 11B120.00 for $2.00.

Guess what happened?

Just like the previous two times, FFIV responded by shooting higher.

And once again, we “rang the register” by selling these calls for $2.70, good for a 35% winner.

Thats three trades all in the span of a single trading session — all on FFIV — and all were solid winners.

But the story doesnt end there…

At the close of trading, we jumped back into another FFIV trade.

We entered the FFIV February 130 Calls O:FFIV 11B130.00 for $1.20.

And first thing the following morning, we sold these calls for $1.90, good for a sweet 58% return.

Add it up, and thats four consecutive trades on FFIV that gained 30%, 31%, 35%, and 58% — all in a matter of hours.

The chart below show you these fast-action moves…

If you started with $1,000 and reinvested your profits from one FFIV trade to the next, you wouldve turned $1,000 into $3,639 in less than 2 trading days.

Thats a 3-for-1 return!

$5,000 wouldve grown into $18,196.

And remember, this is one example of what Bottarelli Research can do for you in just two trading days.

The One and Only Technical Indicator That Always Works Automatic Money Principle #5

Its a dirty little secret of floor traders, but most of them use NO technical analysis.

Because in the time it takes them to study a chart — and identify all of the intricate signals involved in pure technical analysis — theyve probably missed out on making 2 or 3 winning trades.

Thats why most floor traders are trained to use only one simple metric to identify support and resistance points…and it works better than the hundreds of other indicators out there today.

Without giving away the secret, theres one simple metric found on a stocks 6-month and 12-month chart that tells you — with a very high degree of accuracy — whether the stocks up-trends or down-trends will continue.

Stocks in up-trends typically find support at these levels and stocks in down-trends typically find resistance at these levels. Therefore, if an up-trending stock is bouncing off this indicator, its safe to buy calls. And if down-trending stocks are selling off at these levels, its safe to buy puts.

Our recent trade on Netflix NFLX NASDAQ is a perfect example…

In late January 2010, NFLX tested — and quickly jumped higher — right at the critical $50 level. This was a sure-fire sign that NFLX was going to move higher, and thats when I recommended buying call options.

On January 27, we entered the NFLX February 52.50 Calls QNQ BQ for $2.20.

Not long after that, NFLX exploded in value, and we sold our calls for $9.30, good for a 323% return!

When you subscribe to Bottarelli Research Options, youll put all five trading secrets together and have a trading service whose financial pedigree is unlike anything youve ever experienced.

Options Trading Strategies

Investing in the stock market can be a great way to save money and make money, if you know what you’re doing. If you don’t know what you’re doing, investing in the stock market can be a great way to lose money and become poor quickly. This is especially true for specific aspects of stock trading, such as options trading strategies. A good options trading education is particularly important, even if one decides that options trading strategies are too risky to be included in a portfolio.

What is options trading? Essentially, a stock option is a right to buy a stock, without actually buying it. The hope is that the stock price will rise, giving the investor the right to sell the option at a profit, or to call the option and sell the stock immediately.

With option trading, you do not buy the actual stock, but only the right to buy it. If the stock is at $100, perhaps you would purchase the option for $10. At $10 per option, your $500 will get you the rights to fifty stocks, instead of only five. If the stock goes to $120 per share, you call the stock, which means you exercise your right to buy the stock at its original price of $100 per share, and then turn around and sell it for the new price of $120. This means that you’ll have the 120% worth of your fifty shares, which have gone up a collective $1000. Subtract your cost of the trading options and you’re left with a net profit of $500.

In the first case scenario, your profit is 20% of your initial investment, the same as the increase in stock price. But, in the second case, your profit is 100% of your initial investment. Options are a way to trade higher volume of stocks with less money. Of course, the higher volume you trade the more you can potentially lose, which is why option trading is more risky. Good options strategies calculate risk and trade accordingly.