Conservative Corner

Day Traders, Swing Traders, and Options?
Day traders and swing traders typically believe that the nature of their business precludes the use of options. After all, with bid-ask spreads, commissions, -- not to mention decay rates -- options become prohibitively expensive compared to the small flips that day traders cherish.

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Options 101: The Collar Strategy
Another protective strategy that allows for some upside capital gain while providing maximum down side protection is the collar. The collar is a combination of the covered call and protective put strategies. The collar uses a long put position in coordination with a short call position along with a long stock position. In other words, it is a protective put added to a covered call.

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Covered Calls: A Case Study
The purpose of this case study is to compare the results of stock ownership versus owning the stock and writing calls against it (covered call). As a review, a covered call is where investors sell, or write, a call option against stock that they own. Investors write one call for every 100 shares of stock owned. In doing so, they have the potential obligation to sell those shares at a specific price over a given time period. This means that the investor gives up some capital appreciation in exchange for cash.

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Options 101: The Covered Call / Buy-Write Strategy
For better or worse, most 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 investing remains a topic for discussion. However, it is still the strategy that most 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 plain stock ownership alone.

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Premium Collection Corner

Option Straddles Strategy
We discussed option strategies that feature the use of options in combination with stock (like the buy-write), and the use of options against each other in the form of spreads. Now, we will focus on the straddle, which uses options in unison with each other. Unlike a spread which features one long option versus one short option, straddles feature two options both long or both short.

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Time Spread Strategy
Time Spreads, also known as Calendar Spreads, are an ideal way to take advantage of time decay and changes in implied volatility. The time spread strategy focuses on the movement of time and volatility more than on the movement of the stock. Therefore, this strategy is ideal for use when you anticipate either stagnant or explosive periods in a stock.

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Options Strangles Strategy
The Strangle is another option strategy that features the use of options in unison with each other. The Strangle is philosophically identical to its "cousin" the Straddle. However, whereas the Straddle has a single strike as its focal point, the Strangle has its focal point spread out over two strikes.

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Buy-Writers Beware!
Although the buy-write and covered call strategies are and have always been considered one and the same, I have always seen them as subtly different in a very important aspect. Technically speaking, a buy- write is the simultaneous purchase of stock and sale of a call. Investors use buy-writes to present two orders to the market makers thereby getting a little better price. Because the buy-writer ends up with a long stock plus short call position, many traders consider them to be the same strategy but let me give you a little different perspective.

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Directional Corner

Options 101: Advanced Strategies
The stock replacement version of the covered call strategy is an example of the proper use of option leverage. It offers the investor a bigger percentage return, less risk and less capital requirement than the traditional covered call strategy.

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Option Spread Trading
We have demonstrated how well options function in unison with a stock position. They enhance potential gains, provide profit protection and limit the risk of the entire investment. They enable us to manage risk in a single stock as well as an entire portfolio. But, as good as options are in conjunction with stocks, they can be even better when traded against each other.

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Protective Calls (Synthetic Put)
Put options can be used to profit from falling stock prices but they can also be used to protect a long stock position. When used in this way, a long put acts like an insurance policy for your stock and is called a protective put. The protective put provides the investor maximum downside coverage for a long stock position.

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Options 101: The Protective Put Strategy
As a reminder, a put gives an owner the right but not the obligation to sell a certain stock, at a specific price, by a specified date. For this opportunity, the buyer pays a premium. The seller, who receives the premium, is obligated to take delivery of the stock should the buyer wish to sell the stock at the strike price by the specified date. A strategically used put offers maximum protection against substantial loss.

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Options 101: Trading Naked Calls & Puts
An option is a derivative trading product that is best used by investors as a hedging tool providing profit protection and profit enhancement. Although it is a powerful risk management tool, it can also be used effectively as a stand-alone trading vehicle. Under the proper conditions, options do not have to be paired with stock or another option to be an effective trading tool. To successfully trade naked options, an investor must realize that certain options will fit certain scenarios and certain options will not.

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