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

 
 
 
 

Sunday, July 5, 2009

Option Strategies for Directionless Markets by Anthony J. Saliba

This week's featured book on options trading:

Option Strategies for Directionless Markets: Trading with Butterflies, Iron Butterflies, and Condors by Anthony J. Saliba

Option Strategies for Directionless Markets: Trading with Butterflies, Iron Butterflies, and Condors
by Anthony J. Saliba
Bloomberg Press (March 2008)

From the publisher: If you know the right strategies, you can profit by trading options in a sideways, or directionless, market. (This is fortunate because directionless markets occur more frequently than bull or bear markets.) This hands-on workbook teaches you the most important trading strategies and how to apply them.

You'll find out how to identify, enter, manage, and exit a trade. The special format makes it easy to learn; illustrations, exercises, what-if scenarios, and quizzes have you mastering the material in no time. The butterfly family of option strategies is covered, including: butterflies, iron butterflies, condors, broken-wing butterflies, pterodactyls, and iron pterodactyls. The greeks--delta, gamma, vega, and theta--are also covered. Understanding the greeks is essential to deciding how to apply the strategies.

If you are a professional or an active individual trader, you can benefit from this book.

Posted by Your Community Resource Guide to Wine, Style, and Finance. at 3:23 PM

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