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 DVD on options trading:
4 Powerful Rules to Successful Options Trading
with Larry McMillan
MarketPlace Books (February 2005)
From the publisher: Learn from the legendary master of options himself, as he provides you with profit-enhancing tools every success-driven trader should have in his arsenal. Gain insight as Larry McMillan expounds on his powerful rules of success:
• Always use a model.
• Trade all markets.
• Use follow-up strategies.
• Only trade in accordance with your personal philosophy.
The strategic choice between hedging and speculating isn't easy. This informative presentation will train you how to recognize and evaluate which trading scenarios are best suited for each option, so you can thrive in any market. You will get advice on how to eliminate frustration when things go wrong, how to most effectively manage your risk level, and what the concept of naked call writing is really about. The in-depth insight and potent methods presented in this outstanding trading session will enable you to develop an action plan you can put into use immediately. Stop envying all those successful traders out there! With McMillan's forceful trading system on hand, it's your turn to step up!
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