Options Trading Strategies
Blog 4: Options Trading Strategies
Sam Hooker
This blog post will discuss some of the basic strategies investors use when trading options.
Covered Call
A covered call is an options strategy where an investor owns a stock that they plan on holding onto, and they write (sells) call options on that underlying security. This generally occurs when an investor is unsure what will happen in the short term, but is confident in the performance of the underlying stock in the long run. The investor will make no money on owning the stock in the short run if it stays static, but will make income from the premium on the options if the stock drops or stays below the break-even point. This strategy is just a short-term hedge for investors that are weary of the market. A covered call with provide minor gains and losses, but nothing major. If the investor believes the stock will only go up, this would not be the strategy for them.
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Protective Put
A protective put is a strategy that investors use to guard against the loss of unrealized gains in a stock or other asset. Unrealized gains are gains that have been reinvested into the account and not withdrawn, meaning they have not yet been taxed. A savvy investor can purchase a put for the stock with a stick price that is near the underlying stock’s current price. Ideally, the stock’s price will increase, and the gains will be greater than the loss from the premium paid on the put. If the stock goes down in value, because of the put, the investor will be able to recoup funds lost.
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Protective Collar
A protective collar is an options strategy that investors take advantage of when they want to protect the downside against current gains. If an investor recently made money on a specific stock and is worried it is going to diminish they would use this strategy. For a protective collar strategy an investor would purchase a put option to hedge the risk the stock goes down while also writing a call option to finance the put purchase. This strategy is only used to protect against the downside, if the stock increases in price the put will be worthless and the buyer of the call will want his 100 shares. If the price of the underlying stock goes down, the investor will recoup his losses with the put and receive the premium paid on the option.
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