The objective of the Option Sleuth is educate the investor on how a managed option strategy as part of a diversified portfolio can generate additional income and boost returns.
There are two basic types of options: the call and the put.
A call is an option contract that gives the holder the right to buy the underlying security at a specified price for a certain, fixed period of time.
A put is an option contract that gives the holder the right to sell the underlying security at a specified price for a certain, fixed period of time.
Option contracts may be opened as a buy (long positions) or a write (short positions).
The following common option strategies are defined in terms of a net long position, however each strategy may also be opened as a net short position.
• Buy a call
Outlook on the underlying equity: Positive
Potential gain: Unlimited
Potential loss: Limited to price paid for call
• Buy a put
Outlook on the underlying equity: Negative
Potential gain: Limited to the value of the equity
Potential loss: Limited to price paid for put
• Buy a call spread (buy a call and sell a higher strike call)
Outlook on the underlying equity: Positive
Potential gain: Limited to spread value less price paid
Potential loss: Limited to price paid for spread
• Buy a put spread (buy a put and sell a lower strike put)
Outlook on the underlying equity: Negative
Potential gain: Limited to spread value less price paid
Potential loss: Limited to price paid for spread
• Covered call (buy equity, sell higher strike call)
Outlook on the underlying equity: Positive
Potential gain: Varies
Potential loss: Limited to value of equity less price received for call
This week's featured book on options trading:
Understanding Options
by Michael Sincere
McGraw-Hill (September 2006)
From the publisher: Written by Michael Sincere, the best-selling author of Understanding Stocks and other popular investing books, this down-to-earth guide employs short, concise chapters to explain what options are, the various types of options, how to trade options, how to avoid investing mistakes, beginning and advanced options strategies, and much more.
Understanding Options tells you in jargon-free language how options are income-producing tools; how options can be part of an overall investing plan; the relationship between options and stocks; the pros and cons of options, how personal computers have made options easier than ever to understand and use; and much more.
Financial Resources
0 comments:
Post a Comment