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Having said that, there are a number of very successful trading systems that work well over the long term. 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. 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. As an example, say your stock is trading at $29.00 and you feelthat your stock may trade down a little but still remain in anuptrend cycle. There is news that a legal suit against XYZ will conclude tomorrow. The $65 Put is now Way-Out-Of-The-Money and its premium is now $0.25. Other times, you may have to buy your short call back so thatyou will not lose your stock. The greater the bearishness of an investors forecast, the deeper in the money and further apart the strike prices should be. This strategy is implemented by writing a call option while simultaneously buying a call option with a lower strike price. One method of predicting volatility is by using the Technical Indicator called Bollinger Bands. When an investor is less bearish, the strike prices used should be closer to the current market price of the stock and the strikes should be closer together. As long as the price of Google (GOOG) at expiration in one month is trading above ($500 (15 + 16) = $469) and below ($500 + (15 + 16) = $531) you have made a profit. For example, sell $500 Calls on Google (GOOG) with 1 month to expiration and buy $500 Calls on Google (GOOG) with 6 months to expiration. Say you are interested in Apple (AAPL) and think that it will depreciate in value over the next month or remain the same. 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. Say Apple (AAPL) is trading at $120 and you are going to be conservative and write put options with a strike price at the money ($120). You will be buyingone option and selling another, which is commonly known as aspread and is referred to as a single trade. When an investor contemplates any option strategy, he or she should always be mindful of the risks, since trading options is a bit more risky than simple stocks. Buy out of the money put options: This affords lower cost and more leverage; however, a larger move in the stock price will be required to exercise.Buy in the money put options: This provides a better chance of making a profit but more dollars will be at risk since you must pay a greater premium. The wrong strategy even when applied to the right opportunity can increase risk, decrease profits and even create a potential loss. A put option is out-the-money when the share price is above the strike price. You will be buyingone option and selling another, which is commonly known as aspread and is referred to as a single trade. So, if you feel the stock has a real good shot at taking a runup, you can lean your position long by selling anout-of-the-money call. No matter the result of the suit, you know that there will be volatility. One method of predicting volatility is by using the Technical Indicator called Bollinger Bands. The risk/reward profile is very similar to the Long Call; thats why this strategy is also referred to as a synthetic call. 2) Short Combination (Short Strangle): This strategy is similar to the Short Straddle as you write a call and a put option; however, the difference is that with a short combination you use different strike prices. When an investor contemplates any option strategy, he or she should always be mindful of the risks, since trading options is a bit more risky than simple stocks. If we close out both positions and sell both options, we would cash in $8.00 + $0.25 = $8.25. This way, as long as the stock price remains somewhat stable you will profit. I currently hold a B.COM and am working towards the CFA designation.
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