Posts Tagged ‘paradigm shift’
This Home Study allowed a student to scoop over $9,000 with easy 4 trades. So Do You Want To Know About The Covered Call?
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 primarily because the experts have brainwashed us over the years to think it’s better 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 naked stock ownership alone.
When we buy a stock, there are three possible outcomes. As we discussed before, two of these scenarios are typically negative and only one outcome is typically positive. If the stock goes up, that is success. If the stock goes down, that is bad. And if the stock stays still, that is also a bad outcome.
To briefly recap, not only do you have a loss in opportunity cost (the money invested in your stagnant stock could be making you money if somewhere else) but also, you have incurred commission costs on both the way in and way out. So, in this case, only one of the three scenarios provides a positive return.
For the sake of description, we will identify the three potential scenarios as the “up” scenario, the “down” scenario and the “stagnant” scenario. By employing the covered call or “buy-write” strategy, you can change the outcome of the scenario profile so you have two positive potential results instead of only one.
Employing the covered call or “buy-write,” we still have the “up” scenario as a positive result, but now the “stagnant” scenario will also produce a positive result since we collect a premium and the third scenario, the “down” scenario will not be as negative.
Thanks to the covered call strategy, now two of three scenarios end in a positive result and the third has a result that is less negative.
Let’s take a closer look at the covered call strategy and its construction. There are two components of the covered call strategy, the stock component and the option component. The stock component consists of a long stock position (you own stock). The option component comprises of selling one call per every one-hundred shares of stock owned.
Remember, one option contract is worth one hundred shares of stock. So for example, 1000 shares of stock equals 10 call contracts or 200 shares equals 2 call contracts.
The following data demonstrates examples of the appropriate construction of buy- writes.
Please take special note that the ratio of stock to calls must be exactly 100 shares to 1 option contract.
| Number Of Shares Owned | Call Contracts To Sell |
| 100 | 1 |
| 300 | 3 |
| 1700 | 17 |
| 9200 | 92 |
| 14500 | 145 |
| 267000 | 2670 |
The philosophy behind the covered call strategy is not complicated. It means using a long stock position combined with a short call option to build a positive flow of extra income, as, for example, a person would buy a home and subsequently rent it to pay the mortgage.
Another analogy is that of the insurance company. An insurance company receives premiums month in and month out. Over a period of time, this constant stream of income easily builds to a point where it outweighs any pay out the insurance company may face, even for catastrophic events.
The constant and reoccurring collection of option premiums works better if done over longer periods of time (for example, one year.) That time frame allows the odds to play into your favor.
Now let’s talk about the odds. There have been several studies done on the topic of premium buying versus premium selling. The goal of the studies was to determine whether it is better to buy options or sell options.
Recent studies have found that selling the premium was the correct trade 78% to 83% of the time. That is a very high percentage and is worth taking advantage of when a good opportunity presents itself.
The covered call tactic takes advantage of the fact that an option is a falling asset mainly due to its extrinsic value goes to zero at expiration. The process by which an option’s extrinsic value dissipates is called time decay.
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Student Day Trader Beats Recession By Earning $9,900 With 4 Trades. You Can Too By Learning About Options Starting With In-The-Money
An at-the-money option has both advantages and disadvantages over stock and in-the-money options. To start with, the at-the-money option will be less expensive then both the stock and the in-the-money option. So there is less capital requirement and less total risk.
Remember, when buying an option, you can only lose what you spend. The problem is the amount of extrinsic in the at-the-money option.
In order for you to profit from buying an at-the-money option, you need the stock to make a move very quickly. Because you have so much extrinsic value, you will be battling against the option’s daily rate of decay.
So, the movement of the stock must happen quickly enough and large enough to offset the amount of money you will be losing daily as expiration draws near.
With this said, the best chance you have to make money when buying a naked at-the-money option is to use it as a short term trade. The more time you hold onto this option, the more difficult it is for you to be successful due to the options decaying extrinsic value.
For chart below, stock price= $35.00
Strike Price Option Price Delta Breakeven Extrinsic Value
$30.00 $5.20 85 35.20 $ .20
$35. $1.00 52 36.00 $ 1.00
$40.00 $ .30 20 40.30 $ .30
An out-of-the-money option presents many of the same advantage & disadvantage parameters to the investor. The out-of-the-money option is less expensive then the at-the-money option which results in higher leverage and lower risk.
However, with a smaller delta, the stock must move much more than either the in or at-the-money options in order for the options to become profitable. Again, we need the option’s delta to outpace the option’s rate of decay.
Now, with the out-of-the-money option, there is less extrinsic value than the at-the-money option so the amount of total possible decay (cost of the option) and the rate of this decay is less than the at-the-money option.
By being further out-of-the-money, this option needs more movement from the stock. As a naked option, this out-or-the-money example is extremely speculative and should only be used naked when the investor feels there is a very good chance of a stock having a large percentage move.
An investor must understand that the odds of them profiting from the purchase of a naked out-of-the-money option is very slim. When buying a naked out-of-the-money option, be comfortable with the possibility of losing all your money.
For the chart below, the stock price equals $35.00
Strike Price Option Price Delta Breakeven Extrinsic Value
$30.00 5.20 85 35.20 $ .20
$35.00 1.00 52 36.00 $1.00
$40.00 .30 20 40.30 $ .30
Although options can be traded by themselves for directional plays, and can perform well under the right conditions, they are much better used in coordination with stock or other options in formatted strategies which will be discussed in the next section.
While buying naked calls and puts can provide some of the biggest leverage and highest returns, they can also involve the most risk. This strategy should only be used by experienced options traders or traders using risk capital.
I’m Interested In Learning How To Make $9,900 With 4 Trades. So What Is An Option?
An option is a traded security that is a derivative product.
By derivative product we mean that it is a product whose value is based upon or derived from the price of something else. Since we are referring to stocks, a stock option is centred around a number of factors, not least the price of the underlying stock.
There are also options on other traded securities such as currencies, indexes and interest rates, but here we will limit our discussion to stock options, or options based on stocks.
A differentiating thing about an option is that its a falling asset in the sense that it has a limited life, and has to be used before the date on which it expires. As time goes by, the option loses value as it moves closer to its expiration date
When we speak of options in terms of volume, we refer to contracts. Every stock option contract is the same as 100 shares of stock. When we focus on 2 contracts, we are actually focussing on 200 shares, 10 contracts; and so on. For example focussing on 1,000 shares, 75 contracts 7500 shares and so on.
NOTE: It is important to appreciate the value of options before trading them. When an option is quoted at One Dollar.00 each contract, the speculator must remember that the $1.00 represents a price of $1.00 every share, not every contract. Remember that every contract is worth One Hundred shares. This implies that if you were to get one option contract valued at $1.00, your total cost will be One Hundred Dollars.00 (1contract x$1.00 per share x 100 shares per contract). If you were to get 10 contracts for $1.50 each contract, your whole cost works out at $1500.00. Use the formula below when calculating total dollar cost of the option.
Total Dollar Cost of Trade = Number of Contracts x Price per Contract x 100
Option contracts are literally a sales agreement between two parties. The two parties are the buyer (or holder) and the seller (or writer). When you purchase an option contract you are judged to be long the option. When you sell an option contract, you are assumed to be short the option. This, of course, is assuming you had no previous position in the said option.
In an option contract, although it seems as though the buyer and seller must be tied together, they are not. You see, the owner doesn’t actually buy from the original owner and the original owner doesn’t really sell to the new owner.
In fact, a group called the Options Clearing Corporation (OCC) jumps in the middle of the two sides. The OCC gets it from the seller and gives it to the purchaser. This makes the OCC neutral, and it allows both the buyer and the seller to trade out of a position without involving the other party.
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A UK Forex Trader Turned $2,000 Into $9,700 in Only 35 Days And Then Exploded His Account To A Jaw-Dropping $218,000?
What Online Training Courses Are There To Learn About Making Money Options Trading
In the current credit crunch environment, the best remedy for feeling alone in the market is for you to get more involved in your own investing decisions. The issue is that most individual traders do not have the insights, training, or inclination to conduct their own research.
The growth of the worldwide web has resolved part of this issue in that the net now gives accurate information straight to the investors home.
Earnings reports, income statements, balance sheets, graphs, analyst research, and even Chief Executive Officers conferences are easy to get from the internet. Now, investors have all the tools necessary to make their own decisions.
However, for many the problem cannot be avoided and still exists. Why? Because, all the tools in the world are no good to you, if you don’t know how and when to use them. The truth of the matter is that most investors are not qualified or properly trained to interpret the use of these tools, and are therefore ill equipped to use them in making their own investment decisions.
So what could investors do? The solution is to get a professional trainer to help you take the first steps to you making a fortune. Not to make stock option buying decsions for you, but to get you to make informed and, most important, profitable trades in your own right. `
You need to become more involved, and the first step in the involvement process is education.
Those who invest in the stock market know that there are 3 potential outcomes after buying a share.
First, the stock can go up in value and this is mostly a successful result.
Second, the stocks can go down and this is usually a bad outcome.
Third, the position can go nowhere – which is also typically a poor result. It is bad because not only could you have put that money to use in something with less risk that might have produced a return, but you also incurred commission costs on the way in and out which added to your loss.
So, we see that there are three possibilities that can occur when you take on a new position, and two of them are unsuccessful. Now, what if we hinted to you that by using a specific money making strategy, you can greatly improve your chances of success?
As oppose to having 2 of the 3 possibilities go wrong, you would have 2 of the 3 possibilities that could go right. And, the third scenario, the bad one, wouldn’t be nearly as bad.
It can occur by using a few of the many tactics involving matching stocks with options. Sound exciting? Fantastic, but let’s not get ahead before laying the building blocks first. Click this link to learn how an Options DayTrader made $9,900 with 4 trades and also receive free reports worth hundreds of Dollars.
Trader Turns $2,000 Into $9,700 In A Few Days? You Really Should Learn These Secret Options Trading Strategies
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 founded on this. 2 a) skill in supervising or planning, in particular
by using stratagems b) a stratagem or artful means to some end. When applying a definition to investing in the market, we want to pay particular attention to the words “maneuvering into the most advantageous position prior to actual engagement” and the words “skill in managing or planning especially by using stratagems.” Picking a stock or group of stocks is only half the battle. Making the most from the chosen investment opportunity is the other half. This is the point where your strategy comes in. The incorrect strategy even when employed to the correct opportunity can
produce added to risk, reduced profits and even possible loss.
Therefore, understanding and applying the proper strategy is critical.
The actual selection of an investment opportunity from those offered normally depends on the type and style of research the investor favors and deems necessary. This selection procedure or “investment selection protocols,” is a checklist of various types and bits of information that are preferred by the individual investor. These bits of information can be charts, indicators, oscillators, fundamental analysis, news or tips. Each investor has his/her own investment selection protocol. As an investor, once you finish this procedure and select your investment opportunity, your strategy does the rest. Inherent in the selection of the stock is expectation. Every investor has some expectation for any chosen opportunity. Therefore a strategy must be selected which best fits those expectations. The proper strategy will be the strategy thay allows for the highest possible return with the least amount of risk and the best possible protection that can be afforded. Click Here And Simply Give Your First Name And email To Get Several Free Reports Including The Several Deadly Sins And Candlestick Secret Trading Strategies. In Addition, Look At A Home Study Course