Buying and selling calls and puts together gives you the ability to create powerful trading positions. Option strategies put you in control of defining specific price points to target. Go ahead and browse through a few examples of what's possible when using options to trade.
I say generally because there are such a wide variety of option strategies that use multiple legs as their structure, however, even a one legged Long Call Option can be viewed as an option strategy. Under the Options link, you may have noticed that the option examples provided have only looked at taking one option trade at a time.
How could a trader profit from such a scenario? Let's take a look at this option combination;. Now, when you're the option buyer or going long you can't lose more than your initial investment. But what happens if the market rallies? The put option becomes less valuable as the market trades higher because you bought an option that gives you the right to sell the asset - meaning for a long put you want the market to go down.
You can look of a long put diagram here. However, the call option becomes infinitely valuable as the market trades higher. So, after you break away from your break even point your position has unlimited profit potential. The same situation occurs if the market sells off.
This means that you will exercise your right and take possession of the underlying asset at the strike price. That might not sound like much, but consider what your return on investment is. This is just one example of an option combination.
You've probably realized by now that buying and selling options requires more than just a view on the market direction of the underlying asset. You also need to understand and make a decision on what you think will happen to the underlying asset's volatility.
Or more importantly, what will happen to the implied volatility of the options themselves. Well, the only tool that I know of that does this well is the Volcone Analyzer. It analyzes any option contract and compares it against the historical averages, while providing a graphical representation of the price movements through time - know as the Volatility Cone. A great tool to use for price comparisons. Anyway, for further ideas on option combinations, take a look at the navigation in the side bar and see what strategy is right for you.
Hi Peter, Thanks for your help. Thank you and regards. Hi Luciano, The pink line represents the change in the value of the position relative to the current theoretical price. This line, at the expiration date, will be the most you can gain or lose for each corresponding x-axis stock price point. Hope this is clear, please let me know if not. You did a great job for newbies like me! Hi Renee, yes they are already added as either long or short i. Long Straddle and Long Strangle. If I've actually short a stock and it now is trading higher, is there any option repair strategy I can use to limit my loss?
Most option repair strategy only gives example starting out with a long position on a stock. Hi Terry, Aplogogies for the delayed response! The ATM point will be at the "forward" price, which will be slightly higher than the stock price depending on the interest rate.
If interest rates are zero then the ATM price will be the stock price. I'm not really sure what the best volatility to use actually is. Some prefer to stick to a one year rate while others will use an historical level appropriate for the expiration of the options.
What is the website you're looking at for the vols? Hello, just downloaded your spreadhseet. I'm, mainly interested in the deltas for my particular use. I noticed that the at the money calls were at. Which would be the best to plug in to your spreadsheet to calculate most accurate delta's. The shortest term 1mo?
Dear admin can u suggest me any new strategy except these strategies.. What exactly is the pink line in the diagrams? It appears to be some average over time but I can't find a definition anywhere. For American options you can use the Binomial Model - there is a spreadsheet on the Binomial page. Hi I've used the Option Trading Workbook. Any chance we get an american options enabled one? Dear All, Best strategy which I have come across. Regards Amit S Bhuptani.
Mmm, that's a tough question to answer here Rakesh ;- I'd say your best bet would be to invest in a program like MultiCharts.
MultiCharts can chart, scan and auto-trade stocks through many different brokers. Plus, it provides an easy to use scripting language that allows you to design and backtest trading ideas before risking real money. I have it and love it! I also wanted to know the procedure of picking the right stock in intraday trading?
If you simply say that ATM strike is the strike closest to the stock price, then yes the call will normally have a higher premium than the put. However, the ATM strike should really be driven by the "forward price" of the stock. As option contracts carry the right to exercise at a point in the future, their value is first based on the future price of the stock, which is the stock price plus the cost to hold the stock cost of carry or interest rates less any dividends received during that period.
As you apply the interest rates and dividends to the current stock price you will calculate a price different to the stock and this is the true ATM price. For retail traders who are simply eye balling the option screen to see where the ATM is, just using the stock price is good enough, which is why they've noticed that the call premiums are higher than the puts as the true forward price is actually higher than the stock price.
Call, put and stock prices for the same strike are all related and cannot violate put call parity. Take a look at that link to read more and let me know if I've missed anything or if you have any questions.
I just finished reading a book on options and one of the discussion points was that an ATM call will always have a higher premium than a put at the same strike. If I find a put which has a higher premium then a call at the same strike price, is this unusual? Is there a way to take advantage of such a situation?
Is it fair to assume that this is a temporary situation? Hi Ash, If the option is out-of-the-money then, yes, it will begin to lose value very quickly as expiration approaches. If you are happy with any profit you've made already then you should exit while you can. Hi Peter, I have a question on when to close out my position on a call option. I currently have a April call option and i wanted to know if there are any best practices around when to closeout your position if you are not planning on purchasing the stock at expiry?.
I am asking this because as time goes by the price of options go down. It is end of feb now and my options expire in Apr. Your input is appreciated. Hi Rakesh, If you want limited risk and unlimited profit potential then you are best looking at positions like long call , long put , long straddle , long strangle etc - these are strategies where you are net long options.
Hi, Can anybody tell me the statergies that I need to keep in mind before trading in "Options"? So that the risk percentage is nominal and the probality of profit is high. Hi eh, This strategy is called a short guts and is similar to a short strangle except you are shorting a put with a higher strike price, where a strangle sells the put with a lower strike price. The payoff calculation is a little different also: Can I ask why would choose this approach instead of selling the call and the put?
Hi Varun, Do you mean selling a call and a put together at the same strike price i. If so, and the combined premium for this trade was 10, with the underlying now at , then; Net premium received: Take away the premium already received and you're left with -1, Hi, I am new to this and this site has been a big help , I wanted to clarify one thing.
Please do clarify whether this is possible or not. Peter If I buy a call e. Thanks and when I click e. You can take a look at the option prices on Yahoo. Peter I'm a new guy here Peter, What if I sell K put on the day of expiration of the contract and the stock does not move significantly in value to exercise the contract for who ever bought it. Do I get to keep the commission? You won't be able to roll over at the same price - if you want to keep a position in the same strike price, you will have to sell buy out of the front month contract and buy sell into the back month at the current market prices.
Further, if I need to rollover my position to next month, then do I need to pay some extra premium or can I rollover at the same price?
You would close your position for a profit without having to wait until expiration to exercise the option. Hi Peter, Really good information on Options. I had one question - Suppose I buy a an option Call for Rs 30 whereas the index is at Within 2 hours, index moves to and option premium is RsMore...