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And remember - it's always good to start with pretend trades to get the hang on things, before you commit your life savings to the market. Other times, you may have to buy your short call back so thatyou will not lose your stock. When to use a Long Combination: An investor feels a stock will make a large price move but is unsure of the direction.For example: buy XYZ June 20 Puts and buy XYZ June 30 Calls. Some stocks will move depending on which candidate wins and you decide to focus on Starbucks (SBUX). Normally time spreads have a neutral basis but they can also be designed for a bullish or bearish basis. As long as the price of Apple (AAPL) is less than (120 + 5 = $125) at expiration, you have made a profit. Remember when you sell an option you seek to capture extrinsicvalue. They can buy different amounts of Calls and Puts with different Strike Prices or Expiration Dates, modifying the Straddles to suit their individual strategies and risk tolerance. When an investor is less bearish the strike prices used should be closer to the current market price of the stock and the strike prices should be closer together. One of the major misconceptions that investors have about options stems from the fact that most do not trade them properly. An investor feels a stock will remain between the two strike prices. Picking a strike price that will maximize the profit earned when the stock price decreases. However you also run the risk that the stock will continue to fly upwards and you miss out on that profit. Say you are interested in Apple (AAPL) and think that it will depreciate in value over the next month or remain the same. The net cost of short selling the stock is lowered by the put premium amount received. If the price plummets, your Put will be way In-The-Money, and your Call will be worthless. Discover how to protect yourinvestments with the leveraged power of options. At expiry, as long as the Apple (AAPL) is trading above (120 6 = $114) you have made a profit. An option is a derivative trading product that is best used by investors as a hedging tool providing profit protection and profit enhancement. An investor feels the stock will remain at or very near to the strike price. You know this will effect Starbucks (SBUX) bottom line so you decide to implement a long straddle because you are not sure which candidate will win. An option is a contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset at a fixed price on or before a certain date. They do not understand that options are on a higher, more sophisticated level when compared to stocks. This strategy is implemented by simply buying a put option on a stock that an investor feels will decline in value. 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. The straddle strategy is an option strategy that's based on buying both a call and put of a stock. The success of this strategy will depend on 3 conditions:. Covered call, where you Long the underlying asset and short call options. One of the major misconceptions that investors have about options stems from the fact that most do not trade them properly. The second month option will be sold short thus re-initiatingyour covered call strategy. Your lean willdictate to you which new option to sell. Picking an expiration month with a long enough duration for the stock price decrease to occur. This provides you with the option premium while your maximum risk is infinite (the stock can potential increase to infinity, ha).
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