Showing posts with the label option-strategies-with-examples


THE OPTIONS COURSE LONG CALL In the long call strategy, you are purchasing the right, but not the obliga tion, to buy the underlying shares at a specific price until the expiration  date. This strategy is used when you anticipate an increase in the price of  the underlying stock. A long call strategy offers unlimited profit potential  with limited downside risk. It is often used to get high leverage on an  underlying security that you expect to increase in price. When the underlying security price rises, you make money;  when it falls, you lose money. This strategy provides unlimited profit po tential with limited risk. It is often used to get high leverage on an underly ing security that you expect to increase in price. Zero margin borrowing is  allowed. That means that you don’t have to hold any margin in your ac count to place the trade. You pay a premium (cost of the call), and this  expenditure is your maximum risk. Perhaps the only drawback is that opt


OPTION STRATEGIES Options allow the investor to sculpt the returns in their portfolio. When you buy a stock and the price rises $1, you make $1. You lose $1 if the price declines $1. Your profits are linear and directly related to only the change in the price of the stock. Interest and dividends will make a slight change to the outcome though these factors are also linear. Options blow apart this linearity. Options are called convex instruments because the returns are not linear but curved. We saw that in the previous chapters. You can literally create millions of possible returns through the use of options. You can mix and match options to create just about any return possible.   Selecting a strategy is a multi step process. You should go through a systematic process before initiating a trade. Each step should lead to further refinement of the strategy. It can be very dangerous to your bank account to disregard some or all of the major factors that affect options prices.