Options are financial contracts that give the buyer the right, but not the obligation,
to buy or sell an underlying asset at a specific price, known as the strike price, on, or before, a specific date.
Understanding options involves knowing the key terms associated with these contracts.
Strike Price: This is the agreed-upon price at which the buyer of the option can buy or sell the underlying asset.
Value Time: The time value of an option is the premium paid by the buyer to the seller for the option to buy or sell the underlying asset.
Volatility: The volatility of the underlying asset is a measure of the potential price movements of the asset. This volatility affects the price of options.
Premiums: The buyer of an option pays a premium to the seller for the right to exercise the option. This premium is the price of the option.
There are several popular option strategies that traders use to manage risk and generate income
Each strategy has its own advantages and risks
you can make money even if the market doesn’t move and is flat
Some popular examples:
This strategy involves selling a call spread and a put spread on the same underlying asset.
The trade profits if the price of the underlying asset stays within a certain range.
However, if the price moves outside of this range, the trader can experience losses.
This strategy involves selling a call or put option at a higher strike price and buying a call or put option at a lower strike price.
The trader receives a credit for this trade, which can be used to offset potential losses.
However, if the price of the underlying asset moves against the trader, losses can occur.
This strategy involves selling both a call and put option on the same underlying asset, with different strike prices.
The goal is to profit if the asset price doesn’t move substantially, and stay in the range between the put and the call
There are a huge number of possible combinations and strategies with more or less risk, you can define the risk and the maximum losses you want, these allow you to either protect your portfolio and/or collect premiums
A covered call can generate income from a stock position without risk because, you protect the short call with your stocks
1- Own stock (100 shares for a total security)
2- Sell CALL contract (1 contract = 100 shares)
Selling naked PUT
You can sell naked put if you think the stock price is going to go up or stay above the strike,
use this on stocks you want to buy anyway, maybe you ll have these for less in case the price drop at the strike or below
You have to take into account that the risk in this strategy is if the stock drop, you can lose (X contract x 100 x the strike)
Watch the VIX (Volatility Index) to know when sell CALL/PUT
For better return, sell it when volatility is high > 20 %
You have to also watch the implied volatility of the options