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:
The Ten Most Powerful Option Trading Secrets with Bernie Schaeffer
with Bernie Schaeffer
Marketplace Books (February 2005)
From the publisher: Learn from the father of options himself as he teaches you the ten most powerful option trading secrets. Bernie Schaeffer, best-selling author and leading option guru, grants you an exclusive glimpse into his private world of options: Find out how he reads the markets, how to go successfully against the crowd, and why he detests some of the most popular option strategies. Starting off with the most common pitfalls of trading, he then provides you with his personal top ten trading secrets. This highly informative presentation includes valuable tips such as:
• Trade only in the direction of the trend.
• Buy put options in addition to call options.
• Use time stops, not price stops, to limit losses.
• Don't trade options solely on whether implied volatility is high or low, and much more.
By gaining insight into the master's personal trading tactics, you will soon be able to take control of your profit potential more effectively. Reduce your market risk and enhance your gains by putting into practice these words of wisdom. Find out what the markets are really telling you!
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