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Although it is a powerful risk management tool, it can also be used effectively as a stand-alone trading vehicle. Put Writing (Short Put): Simply sell put options on a stock. The bottom line is: for a Straddle strategy to be profitable, there has to be volatility, and a marked movement in the stock price. An investor wants some limited upside protection from purchasing the higher strike price put option. You buy calls and puts with the same strike price on Starbucks (SBUX) and same expiration month. It's inevitable that catching one of those stocks just before it takes off is an exciting possibility, inspiring the beginning trader to take the plunge. Picking an expiration month with a long enough duration for the stock price decrease to occur. Options prices are dependent upon the prices of their underlying instruments and can be used in various combinations for virtually unlimited market moves. An investor feels a stock will experience a large price move but is not sure in which direction it will occur. If the price of the stock increases, then the put would expire worthless, but you still benefit from the increased stock price. For instance, if you feel that the stock itself has a very highchance of producing capital appreciation above the potentialamount of premium you could receive from selling an at-the-moneycall, then sell an out-of-the-money-call so you can allowyourself a little more room to the upside on the stock. The greater the bearishness of an investors forecast, the deeper in the money and further apart the strike prices should be. For a beginner, it's easy to get drawn into the complex net, believing that there must be a simple solution that will hand you the keys to stock market success. This provides you with the option premium while your maximum risk is infinite (the stock can potential increase to infinity, ha). There are 6 common Bearish Option Strategies implemented by investors: Long Put, Protected Short Sale, Covered Put Sale, Short Call, Bear Put Spread, and Bear Call Spread. If Straddles are so good, why doesn't everybody use them for every investment?. 2 a) skill in managing or planning, especially by using stratagems b) a stratagem or artful means to some end. You can sell Puts on Apple (AAPL) and received the option premium in exchange for the risk that the stock may decrease in value up to the expiration of the stock options you sell. Therefore a strategy must be selected which best fits those expectations. This selection process, or "investment selection protocols," is a checklist of different types and pieces of data that are favored by the individual investor. It's important to realize that a winning system is one that consistently delivers profit over a longer time frame - and part of the equation is that a percentage of trades will be losers. How to choose the Strike Price?The strike prices used will depend on how bearish an investor is. This way you can increase your window of profit opportunity just incase there is a price move. A put option is in-the-money when the share price is below the strike price. For example: write the XYZ June 30 Put and also write the XYZ June 30 call. For example, lets say the stock is trading at $27.00. For Example, say you have $1600 and think Google (GOOG) will increase in value: say it is currently trading at $500 a share but you only have enough money to buy 3 shares. This tends to work as the time value component of an options value usually erodes faster the shorter the term to expiration. The risk/reward profile is very similar to the Long Call; thats why this strategy is also referred to as a synthetic call. However, you need to consider other aspects of the options price like volatility. An investor feels the stock will remain around the strike price.For example, the investor writes a near term option with a strike price near the stocks current market price and buys a long term option and hopes the time value of the near term option will erode in value faster than that of the long term option. You buy puts with a strike of $25 1 month to expiration for say $1.
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