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Options
What is an Option?
Buying options provides a way to profit from the movement of futures contracts, but at a fraction of the cost of buying the actual future. Buy a call if you expect the value of a future to increase. Buy a put if you expect the value of a future to fall. The cost of buying the option is the premium.
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COVERED CALL

What is a Covered Call ?



The covered call is a strategy where an investor writes a call option contract (sells an option) while at the same time owning an equivalent number of shares of the underlying stock.

If this stock is purchased simultaneously with writing the call contract, the strategy is commonly referred to as a buy-write.

While you may have heard that trading options is risky business, covered calls are actually a very conservative strategy, and most brokerages even allow retirement IRA accounts to write covered calls.

Win With Options During Market Uncertainty

Forget about volatility. Whether you believe the market will go up, down, or sideways, there is an option strategy for you.

More and more investors are using options in their trading as a way to beat the market. And that's why the number of options contracts traded has been setting all-time records.

Whether that's because of the recent market volatility or in spite of it, options can provide staying power.

Plus, options are flexible. You don't need a lot of money to get started. And it's a lot easier than you might think.

Flexibility

One of the key advantages with options is you can make money in any market direction. You can make money if a stock goes up, down, or sideways. And with some strategies, you can even be wrong on the direction of a stock and still make money with the option.

Of course that doesn't mean you can just close your eyes and pick anything. But it does mean that you can make money in virtually any market condition - even when you're unsure what the market will do.

Leverage

Another advantage with options is leverage. You can get started in options with only a fraction of the money you would normally need to get into the actual stock. And many option strategies come with a guaranteed limited risk.

It's these advantages, and more, that can make options a perfect addition to someone's portfolio.

What's interesting, however, is that even though the popularity of options has soared, they are still not as well known or understood as much as stocks. But they should be.

Bullish

If you're bullish on a stock, you can buy a call option on it and make money as it goes up.

Momentum stocks and Aggressive Growth stocks are probably the best kinds of stocks to use for this. These are stocks that are on the move with some of the most explosive upside potential.

Bearish

If you're bearish, you can buy a put option and make money as the price goes down.

Look for stocks trading at excessive valuations. Focus in on the ones with downward earnings estimate revisions. And if they are below their major moving averages like the 50-day and 200-day moving average, even better.

Big Move in Either Direction

If you believe a big move could occur in either direction, but you're not sure which way, you can make money with a straddle or a strangle. This entails buying both a call and a put at the same time.

One of the best times to use this strategy is before an earnings announcement, or an important event. Some of the best stocks for this option strategy are high beta stocks. These are stocks that can move big, and that's exactly what you want to see happen with this kind of strategy.

Once again, in order for a stock to make a big move, there usually needs to be a catalyst. One of the most reliable catalysts out there for big moves (up or down) is earnings reports. But lately, there have been plenty of political events, not just in the US, but around the world, that have sent stocks sharply in one direction or another. This can create the kind of potential volatility to really make a strategy like this work.

Slower, Moderate Move

If you're expecting a stock to go up or down, but you expect the move to be moderate or slower, then spreads are a great strategy for this.

For example, a bull call spread involves buying a nearby strike and selling a farther out one. If the stock goes up, but slowly, the nearby call you bought should increase in value, in spite of some time decay loss. But the call option you wrote will benefit from time decay, thus making the spread more profitable than had you only purchased a call. You can do this with a put spread as well. It works the same way, but instead, you make money as the market goes down.

This is a great strategy for stocks you expect to see move, but not necessarily with a big splash that you would see with the top rated or bottom rated stocks.

Sideways

How about making money if the market goes sideways? You cannot make money in a stock if it goes sideways. But you absolutely can in an option.

Calendar spreads are one such strategy. Iron condors are another. (These are simply called 'combinations'.) These are strategies used by many professional traders to consistently make money. It's great seeing stocks go up. It can also be great seeing stocks go down, if you're properly positioned. But more often than not, stocks trade sideways, within a range.

With these types of strategies, a stock can go up from where you got in, or down from where you got in, or just sit still - and you can still make money. As long as it stays within that range, you profit. With such a low risk and high probability, every investor should have these in their portfolio.

The Option is Yours

These are just some of the ways to profit with options. And there are many more. As you can see, options give the investor numerous ways to make money in the market - and in any direction. And you don't always have to wait for the next bull market to make money, because a down or sideways market can be just as profitable.

What are Futures Options?

An option is the right, not the obligation, to buy or sell a futures contract at a designated strike price for a particular time.

Buying options allow one to take a long or short position and speculate on if the price of a futures contract will go higher or lower. There are two main types of options - calls and puts.

Calls – The purchase of a call option is a long position, a bet that the underlying futures price will move higher. For example, if one expects corn futures to move higher, they might buy a corn call option.

Puts – The purchase of a put option is a short position, a bet that the underlying futures price will move lower. For example, if one expects soybean futures to move lower, they might buy a soybean put option.

Premium – The price the buyer pays and seller receives for an option is the premium. Options are price insurance. The lower the odds of an option moving to the strike price, the less expensive on an absolute basis and the higher the odds of an option moving to the strike price, the more expensive these derivative instruments become.

Contract Months (Time) – All options have an expiration date,  they only are valid for a particular time. Options are wasting assets; they do not last forever.  For example, a December corn call expires in late November. As assets with a limited time horizon, attention must be accorded to option positions.

The longer the duration of an option, the more expensive it will be. The term portion of an option's premium is its time value.

Strike Price – This is the price at which you could buy or sell the underlying futures contract. The strike price is the insurance price. Think of it this way, the difference between a current market price and the strike price is similar to the deductible in other forms of insurance. As an example, a December $3.50 corn call allows you to buy a December futures contract at $3.50 anytime before the option expires. Most traders do not convert options to futures positions; they close the option position before expiration.

Example of Buying an Option:

If one expects the price of gold futures to move higher over the next 3-6 months, they would likely  purchase a call option.

Purchase: 1 December $1400 gold call at $15

= number of option contracts bought (represents 1 gold futures contract of 100 ounces

December = Month of option contract

$1400 = strike price

Gold = underlying futures contract

Call = type of option 

$15 = premium ($1,500 is the price to buy this option or, 100 ounces of gold x $15 = $1,500)

More Infomation On Options

Options are price insurance, and they are wasting assets, their values decay over time.

Option premiums have two values – intrinsic value and time value.

Intrinsic value is the in-the-money portion of the option.

Time value is the part of the option premium that is not in the money.

There are three classifications for all options:

In-the-money- an option that has intrinsic value

Out-of-the-money- an option with no intrinsic value

At-the-money- and option with no intrinsic value where the price of the underlying asset is exactly equal to the strike price of the option.

The chief determinate of option premiums is “implied volatility”.

Implied volatility is the market’s perception of the future variance of the underlying asset.

Historical volatility is the actual historical variance of the underlying asset in the past.

In any options trade, the buyer pays the premium, and the seller receives the premium.

Buying an option is the equivalent of buying insurance that the price of an asset will appreciate. Buying a put option is the equivalent of buying insurance that the price of an asset will depreciate. Buyers of options are purchasers of insurance. When you buy an option, the risk is limited to the premium that you pay.

Selling an option is the equivalent of acting as the insurance company. When you sell an option, all you can earn is the premium that you initially receive. The potential for losses is unlimited.

The best hedge for an option is another option on the same asset as options act similarly over time.

 

 
         
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