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They do not understand that options are on a higher, more sophisticated level when compared to stocks. The closer the call options strike price to the current market price of the stock the greater the level of protection against a price increase, but the greater protection comes at a higher cost. If youare no longer bullish then you would not have bought back yourshort call and instead allowed it to be exercised and have thestock called away from you. The directional play is a good place to start our discussion of option strategies. 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. A collar is an options strategy that combines the use of a covered call and a protective put in order to contain your risk and your reward between two bounds. Each listed option represents 100 shares of company stock, known as a contract. You buy September 500 Calls for $16 (you have $1000 so you can afford 1 contract (sold in 100 board lots). Webster's Dictionary defines the term strategy as " 1 a) the science of planning and directing larger scale military operations, specifically (as distinguished from TACTICS) of maneuvering forces into the most advantageous position prior to actual engagement with the enemy b) a plan or action based on this. Instead of buying the shares you decide to buy call options on Google (GOOG). To view my strategies, tips, and stock picks please visit You can make a profit if the Calls with a shorter time to expiration erode in value faster than the longer term calls. If XYZ lost the legal battle, the price could have dropped $10, making our Call worthless and causing us to lose our entire investment. For this strategy an investor will normally have a neutral to bearish market forecast. The more you chop and change, the higher your chances of losing more. Having said that, there are a number of very successful trading systems that work well over the long term. Once you start to look at trading stocks, you find yourself plunged into a confusing nightmare where hundreds if not thousands of people are pushing "their" system that is supposedly infallible. This means that you will have to be prepared to roll yourcalls out to the next month come expiration. So our total initial investment is the sum of both premiums, which is $3.75. XYZ won the legal battle! Investors are more confident of the stock and the price jumps to $72. Say Google (GOOG) in one month is now trading at $450:. This is safer than buying either just a Call or just a Put. 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. When the decision is announce the stock will most likely move dramatically in one direction. The greater the bearishness of an investors forecast, the further out of the money and further apart the strike prices should be. Sometimes, allyoull need to do is to sell the next month out 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. So in this way, you are protected dollar for dollar. You buy calls on Starbucks (SBUX) with a strike of $25 and 1 month to expiration for $1. Say you think Google (GOOG) will decrease in price over the next month. With the put options on google (GOOG) your risk is limited to you initial investment while your rewards could be substantial.
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