Tag Archives: options trading

How Options Investing Can Help You Generate Income

When most people begin to invest they start with mutual funds or ETFs (exchange traded funds). Perhaps advancing into stocks after a while. Finally, with some experience and confidence under their belt, they try options. Options trading is not for the feint of heart. They can be quite volatile. There is a chance to double your money in a short period of time, but there is also a chance of losing it all. But with some education under your belt and a disciplined approach you can do quite well.

First, what are options? There are two types: puts and calls. A ‘put’ option gives the buyer the right to *sell* 100 shares of a certain stock at a certain price by a certain date. A ‘call’ option is the opposite — it gives the buyer the right to *buy* 100 shares of stock at a certain price by a certain date. In both cases the ‘certain price’ is called ‘strike price’ and the ‘certain date’ is the ‘expiration date’ of the option.

Options trading is done for many reasons. Typically people buy puts as insurance; you know you will always receive at least the strike price for your stock. Other people use calls and puts for short-term speculation where they feel strongly about a stock rising or falling in a short period of time. And, lastly, some investors (and professional traders) use the option’s time decay to generate recurring monthly income.

When trading options there is a fundamental question of whether or not you should be a buyer or a seller of options. You can make money both ways but since options are a zero-sum game and the fact that the majority of options held until expiration expire worthless, the odds are in your favor if you are a seller of options instead of a buyer.

The simplest, most popular, and most conservative strategy for selling options is called ‘covered calls’ — a situation where an investor owns 100 or more shares of an underlying stock and then sells call options against that position. If the stock is above the strike price of the call option on expiration day then the investor can either buy the option back (if he wants to hold on to his stock) or let it get called away (where the buyer of the option will ‘exercise’ his right and force the seller of the option to sell him 100 shares at the previously agreed upon strike price).

Selling a call option on stock you already have puts a cap on your upside. You will never receive more than the strike price per share (although you can set the strike price to whatever value you like). The plus is that you receive premium (money) the day you sell the option, and that premium can be used to offset any decline in the stock. So you get some downside protection in exchange for putting a cap on the max you can make. In many cases you can make money even if the stock declines, as long as it goes down less than the premium you received.

Covered call investors have modern tools available to them to assist with the most time consuming parts of the strategy. Using a covered call screener to scan all possible investments is a huge time saver. The old way of doing it with a spreadsheet is laborious and seldom yields optimal results. Modern tools will incorporate earnings release dates and ex-dividend dates so that you get a complete picture of all possible trades.

If you enjoy covered call trading there is more info at Born To Sell’s site. For more information about covered call trading, check out Born To Sell.

Iron Condor – Who’s Your Daddy Now, Wall Street?

A number of different techniques and strategies are available to option investors to help assist them in achieving consistent and reliable monthly income from the option market.

For example there is the butterfly spread, the iron condor , the diagonal (an/or the double diagonal), and the calendar spread, the double calendar spread – and, the vertical spread, which is sometimes also referred to as the credit spread.

In actuality, the vertical spread can be discovered inside found many of the previously talked about strategies. It is a core foundational trade to each of their makeup. Take for instance the iron condor. This trade is constructed from two separate vertical spreads – a put credit spread and a call credit spread – each positioned above and below where the underlying stock is currently trading at.

It is also a basic building block of the butterfly spread. The top half of the butterfly spread is actually just a vertical spread – as is the bottom half. An iron butterfly trade is built from a put vertical spread and a call vertical spread.

The vertical spread trade can be built from either call options or also put options.

Following is an illustration of a bear call vertical spread on the imaginary stock XYZ…

Sell 7 XYZ 35 Call Options Buy 7 XYZ 40 Call Options

This hypothetical vertical spread will profit if the stock XYZ stays where it is trading at (or in other words NOT go up) – or heads down. It is a bearish play.

This position is called a bull put spread due to the fact that even though the position is created using put options, it is being placed in such a way that generates a profit if and when the stock being used moves bullishly.

If XYZ does in fact move downwards (or at least stay in the general area where it is currently trading at and NOT go up) this position will be a spread winning trade and the premium collected at the start of the trade can remain as profit in the traders account. And if you like the idea of that, you can also use this spread on dual sides of where the underlying is trading at – creating an iron condor option trade.

Ted ‘Spread’ Nino is an option selling nut case – particularly addicted with the riding the iron condor . Visit iron condor option lab website to watch more about his tiptop undemanding method to play this option income strategy for ongoing profits.

Calendar Spread – A Must Have Strategy For Every Option Trader

The Calendar Spread is an option cash-flow technique that is loved by both pro option traders as well as the retail crowd to create a consistent monthly income.

The calendar spread performs best and kicks off income due to the nature of the trade. This is a theta trade – an option strategy that takes advantage of options decaying value. As the days tick by heading towards expiration day – the time premium in the options lose their value. This in turn is what creates the profit for the calendar spread trader.

These trades can be built from call options as well as put options. In order to create a calendar spread trade, the option trader sells a near month strike on an underlying vehicle – and then buys a later month at the identical strike. Profit can be made from this trade because what happens over time is that the time premium in the closer month option decays at a much faster speed than the later month option. What is left over at expiration day is the difference of the two – which is what gives the trader profit.

Here is a hypothetical example of a calendar spread trade: Sell 5 Nov 60 call. Buy 5 Dec 60 call.

Now while in the example above the calendar position was created using joined together months, calendar spreads can also be created with a gap between the months.

For example, rather than constructing a calendar spread using Aug and Sept month options, it could be created using a Aug month option and an Oct month option – or a Aug month option an a Nov month option.

Ideally the the calendar technique is used with stocks or options that are trading in a range without a lot of movement. However, they can also be profitably traded in trending markets as long as the strikes who were bought and sold are near where the underlying ends up trading at expiration.

When you talk with some option traders, some will tell you they prefer the iron condor and calendar spread strategy because they believe they are easier to manage than some of the other strategies like the iron condor, credit spread, or the butterfly spread. Regardless, the calendar spread is a great strategy to learn and have ready to use in your ‘option trading toolbox’.

To watch more about the calendar spread technique, click over to this training website for gobs of free trading videos, illustrations, and reports on how to properly enter, close, handle and adjust the calendar spread strategy to produce a steady monthly source of income.

Iron Condor – Good Lordy, Watch Out!

The iron condor spread has two faces – and thankfully for us option traders, neither face belongs to Babs. But then again, it’s almost just as bad (almost)

See, usually when new option traders first catch wind of the iron condor trade, they completely flip out – believing it’s the greatest thing since sliced bread. I know I did. Once I wrapped my head around the method I simply couldn’t believe such a trade existed and that no one had ever told me about this thing before. I was convinced this was a holy grail type trade that left very little possibility for losses. Heck, it was just like they all said – it was like being the casino. Just spend a few minutes every month slapping one of these things on and the let it sail to victory – month after month after month…

Of course, new option traders go gaga over this strategy – and who could blame them. It seems to be a trade that’s almost too good to be real.

The problem – is that it is too good to be true.

But it doesn’t have to be that way.

See here’s the deal: The iron condor actually IS a pretty incredible trade. It CAN take very little time to manage. And it CAN produce some very consistent and truly outstanding and impressive returns.

It’s that most new option traders don’t take the time to really learn and understand this strategy. If they did, they would become aware that the trade has two faces – or two sides if you will – and one of those sides can be quite dangerous – that if is not managed and handled correctly can deliver some pretty ugly losses to a trading account.

It all boils down to the risk to reward ratio of these trades. They have a high probability of winning many small trades – but just ONE loss can completely DESTROY a trading account. And if the one trading these birds don’t realize and fully understand this – and more importantly how to properly manage these trades and how to make effective iron condor adjustments – before long they will get creamed and blasted out of the market possibly with a huge, unrecoverable loss.

The key to winning with this strategy is to understand that the the iron condor does have a dark side – but as long as a trader has the proper knowledge to manage those tantrums and fits that are occasionally thrown by the iron condor – and know how to make effective iron condor adjustments, this trade really can turn out to be all that it’s cracked up to be.

To be taught more about the iron condor strategy, click over to this training site for stacks of free education videos, samples, and reports on how to aptly start, remove, negotiate and adjust the iron condor strategy to yield a ongoing monthly source of income.

Generate Additional Income With Covered Calls At Low Risk

Covered calls is the name of an options strategy. In the case of a share investor, it involves both owning shares and selling call options over those shares. The main benefit of the strategy is that it generates income for the investor via the sale of the options.

The sale of the options exposes the investor to risk. That risk is offset by the investor already owning the asset underlying the options. This ownership of the underlying assets is said to cover the call options.

Based on this call option strategy, an investor owns shares and then sells call options over those shares. The options sale generates income. If the share price goes up and triggers exercise of the call options, the share investor is already covered, or protected, by the prior ownership of shares. The investor benefits both from the increased share price and the option income.

The strategy is a buy-write (buy-sell) strategy. An investor buys shares and writes (sells) the call options knowing the shares protect against the call risk of the options. The strategy is based on an investor having neutral or negative price expectations regarding the underlying shares.

For example, let us say that the investor purchases one thousand shares in the ABC Company at ten dollars per share. The investor believes the short term prospects for this firm are at least neutral and possibly negative. In other words, the share price of the stock is expected to stay relatively constant or possibly decrease.

Following purchase of the shares, the share investor sells one hundred AAA Company call options for one dollar an option. The options have a one hundred dollar strike price and one month expiry. This option sale generates income of one hundred dollars.

From this position, one of three outcomes will unfold regarding the ABC stock price. First, it will remain flat within the ten to eleven dollar range. Second, it will fall below ten dollars. Third, it will rise above eleven dollars.

In the first two scenarios, the share options expire worthless without their owner making a call on the shares. In both these cases, our investor continues to own the XYZ shares as well as generating a three thousand dollar income from the option sale.

The third scenario triggers exercise of the call options. Our investor is therefore obliged to sell ten thousand XYZ shares. Total income for the investor is sixty thousand dollars from the share sale as well as three thousand dollars of options income.

In conclusion, covered calls are a low risk way to generate some income on the back of stock ownership. Selling call options does cap the upside an investor can reap from the sale of stock. However, this cap can be varied at the discretion of the investor according to call option strike price selected buy the investor.

Looking for more info on the low risk options strategy known as covered calls? Get the low down instantly in our guide to all you need to know about call strategy .